Fwd: Re: clarifying FOMC

[Basil Moore <bmoore@xxxxxxxxxxxxxxxxx>]

>Date: Fri, 01 Dec 2000 16:18:45 -0600
>To: "J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>
>From: Basil Moore <bmoore@xxxxxxxxxxxxxxxxx>
>Subject: Re: clarifying FOMC
>
>Barkley
>
>Exactly. But I don't know why you are still "mixed" on the endogeneity of
>credit money. You seem to be extraordinarily well-connected? Speak to one of
>you banker friends, and ask them how banks and bank balance sheets grow.
>
>May I be forgiven for giving you yet another quick lecture? Banks set the
>credit (overdraft) limit for each borrower, since they will not lend to
>anyone they suspect will not be a good credit risk. (Just like credit cards)
>
>Then credit-worthy borrowers decide how much they wish to borrow. 'Loans
>make deposits', not 'reserves make deposits'. Borrowers not banks decide how
>much credit they wish to borrow. Banks are price-setters and quantity-takers
>in loan and deposit markets. One must view banks as retailers of credit, not
>as portfolio managers
>
>When loans and deposits increase, banks must find reserves. The CB is the
>monoply supplier of liquidity to the economy. It's central role is to ensure
>the banking system and so the economy remains liquid, i.e. it must smooth
>interest rates and so bill prices, otherwise if they spike they are not
>liquid. The CB must passively supply reserves to the banks as demanded
>(accomodate), but at a price (interest rate) of its choosing. CB's like
>banks are price-setters and quantity takers in their lending markets.
>
>The Fed in the US makes all this nontransparent, because it is unwilling to
>lend indefinite amounts to the banks at its discount rate (frown or hassle
>costs; "borrowing at the discount window is a privilege not a right"-"Why
>are you here again? Let me see your books'). So banks prefer to borrow
>reserves from other banks in the federal funds market at a slightly higher
>rate, no questions asked. When the differential between the ff's rate and
>the discount rate increases, additional banks, who had not previously
>borrowed and so are not hassled, will go to the window and borrow. BR are a
>function of the differential between the D rate and the FF rate.
>
>The empirical support for this story is that bank unutilized credit
>committments are about as large as total bank loans. This implies that
>already approved borrowers could, if they wished under existing aggreements
>roughly double their loans, and so the money supply. All the CB could do to
>discourage this would be to raise its discount rate and tighten its lending
>terms at the window (as in 79-81).
>
>The Fed controls the ff's rate by targetting borrowed reserves, what it
>terms "the degree of reserve restraint" . Through open market operations it
>provides a quantity of nonborrowed reserves insufficent to meet banks' total
>demand for reserves (RR + ER), i.e. it keeps the banks "in the window". If
>it provided UBR equal to TR, so that BR fell to zero, the federal funds rate
>would fall to zero bid, as in Japan at present.
>
>The key point I have been trying to make is simple but also rather subtle.
>The Fed does not control ST rates by increasing or decreasing TR (or the
>high-powered base), as is commonly believed. RR are completely predetermined
>by total deposits in the previous week. They must be made available if the
>banking system is to meet its reserve requirements.
>
>It rather controls rates by changing the PROPORTION of NBR and BR in TR. If
>it wishes to e.g. raise rates, it reduces NBR by open market sales (note not
>TR). This increases the amount the banks must borrow at the window (BR), and
>so the differential between the ff's rate and the discount rate. TR remain
>unchanged.
>
>Have I bored you long enough?
>
>I suppose you are going to New Orleans. Have a ball for me. "I remember it
>well" We are off on the 15th for Stellenbosch. Come see us sometime?
>
>All best
>
>Basil
>
>
>
>At 06:20 PM 11/30/00 -0500, you wrote:
>>Basil,
>>      I did note that it is quite possible that
>>the German and Swiss central bankers have
>>believed that they were being monetarist,
>>although several people have told me of
>>sources that claim that at least the Germans
>>were consciously controlling interest rates
>>all along, but that with endogenous money
>>they could get an outcome that looked
>>monetarist and would lead Brunner et al
>>to conclude that they were monetarist.  Of
>>course, I think the basis of this has been the
>>low inflation records those nations experienced
>>in conjunction with low rates of M growth.
>>      Now, I also suggested that this could come
>>about in an endogenous money world (I am mixed
>>on endogeneity of money, btw), if there were
>>underlying cost-push side elements happening
>>that were keeping inflationary pressures low.
>>I can identify such factors in the comanagement
>>system in Germany with a willingness by unions
>>not to push wage increases due to the historical
>>memory of hyperinflation.  I don't know about
>>Switzerland's case.
>>      In any case, Basil, you are never rude, :-).
>>Barkley Rosser
>>-----Original Message-----
>>From: Basil Moore <bmoore@xxxxxxxxxxxxxxxxx>
>>To: J. Barkley Rosser, Jr. <rosserjb@xxxxxxx>
>>Cc: PKT@xxxxxxxxxxxxxxxx <PKT@xxxxxxxxxxxxxxxx>
>>Date: Thursday, November 30, 2000 5:56 PM
>>Subject: Re: clarifying FOMC
>>
>>
>>
>>>
>>>Barkley
>>
>>May I be so rude as to give you a short lecture? Thank you.
>>
>>Monetarism is based on the twin notions that
>>1) monetary change explains changes in  income and prices, and that
>>2) the money supply (MS) is under the exogenous control of the monetary
>>authorities.
>>
>>The PK recognition and proof that the MS moves endogenously in response to
>>changes in demand for bank credit, and that the authorities provides
>>reserves endogenously and passively (accomodate the banking system's demand
>>for reserves), but at a price (short term interest rate) of their choosing,
>>puts paid to the second monetarist notion.
>>Banks are retailers of credit, not portfolio managers, and like other
>>retailers the amount they sell depends primarily on the demand for their
>>product.
>>
>>The monetarist supporting empirical evidence for their theory was 1) that
>>reserves moved closely with money, so that if reserves were under the
>>control of CB openmarket operations they could be regarded as exogenous,
>>and 2) that the money supply moved closely with prices and output, so that
>>if the money supply was exogenous, "inflation was always and everywhere a
>>monetary phenomenon".
>>
>>But endogenous money also moves closely with prices and output. The demand
>>for bank credit, which drives the money supply, comes primarily from
>>business demand for working capital, i.e. changes in the wage and materials
>>bill. If the growth of money wages does not exceed the growth of average
>>labour productivity, prices will be broadly stable, and inflation will be
>>low. The monetary authorities will take credit for this, and demonstrate
>>that the low rate of growth of the money supply explains the low rate of
>>price inflation. The numbers will back them up. The growth rate of reserves
>>will also be low. But the true explanation is that money wage growth is low
>>and not in excess of labour productivity growth.
>>
>>My point is that the empirical evidence will always appear to support the
>>monetarist argument. In periods of price stability and in periods of rapid
>>inflation central bankers can always point to the numbers supporting their
>>argument. The key point is that although the relationships between money
>>and prices and output and reserves may be stable, the monetarists have the
>>direction of causation backwards in both instances. Many economists were
>>and are still taken in by the apparently confirming empirical relations.
>>Economists cannot show the direction of causation by empirical
>>relationships, in spite of Granger-Sims causality tests. The money supply
>>will always "behave in a way supporting the monetarist arguments".
>>
>>One must first understand how deposits grow (banking overdraft lending
>>processes), and how prices are determined (business markup price-setting
>>processes) in order to sort out the causal relationships. Causal processes
>>can only be demonstrated with theories, never with numbers.
>>
>>But of course you know all this.
>>
>>Best
>>
>>Basil
>>
>>
>>
>>
>>>James,
>>>        My discussion has nothing to do with
>>>the period since 1990 and German unification.
>>>The policy since then has certainly been muddled
>>>by the problems associated with the unification,
>>>with the Deutsches Bundesbank having initially
>>>strongly opposed the one-to-one exchange rate
>>>that was imposed by Kohl between the Ostmark
>>>and the Deutschemark.
>>>        I would agree that monetarism should be
>>>defined as following Milton Friedman's description.
>>>Frankly, I would have to dig around to find a good
>>>citation for the claims that have been made about
>>>German (and Swiss) policy in the 1950-90 period.
>>>But, I know that I have seen these claims made and
>>>specifically by Brunner.  I would note that a successful
>>>supply-side oriented Post Keynesian policy that keeps
>>>wage and cost pushes under control could allow for a
>>>situation where a central bank could control the money
>>>supply (I realize that Basil and others object to such a
>>>concept, thus, we can say that the money supply was
>>>endogenously behaving in a way resembling a desired
>>>monetarist outcome) and still achieve low interest rates.
>>>        My point about the Korean War was that this was
>>>a source of external aggregate demand that helped the
>>>German economy, not that it was a source of inflationary
>>>pressure, although you are correct that there was a runup
>>>in the prices of many raw materials at that time.
>>>        I have read nothing about (actually existing post-
>>>World War II) Austrian monetary policy.  I have seen no
>>>claims that has been monetarist or anything else in
>>>particular, although Austrian macroeconomic performance
>>>has been quite good and it has had a very vigorous and
>>>very centralized corporatist economy-wide wage
>>>bargaining system.
>>>       The claims about German and Swiss monetary
>>>policy have also gone along with observations of their
>>>high degrees of independence from political authorities.
>>>For better or for worse, their alleged success has lain
>>>behind the model for the ECB, with various other
>>>countries, including the UK and Japan, moving in that
>>>direction of greater central bank independence.
>>>Barkley Rosser
>>>Professor of Economics
>>>James Madison University
>>>Harrisonburg, VA 22807 USA
>>>http://cob.jmu.edu/rosserjb
>>>-----Original Message-----
>>>From: schulte-baeuminghaus <cresscourt@xxxxxxxxx>
>>>To: J. Barkley Rosser, Jr. <rosserjb@xxxxxxx>
>>>Date: Tuesday, November 28, 2000 4:18 PM
>>>Subject: Re: clarifying FOMC
>>>
>>>
>>>Barkley Rosser,
>>>
>>>I'm not quite sure what your question has now become.
>>>It's for you to judge for yourself whether a policy of low interest
>>>rates "disproves the claim that they followed monetarism." I wouldn't
>>>want to press any particular point of view but rather to present the
>>>facts as I understand them.
>>>Emphasis on low interest rates tended to be the mark of Keynesian
>>>policies and of course was a feature of Full Employment White Papers
>>>at the end of the war.
>>>The huge difference between Germany and Austria in the last ten years
>>>or so has been that Germany was reunified during that period and had
>>>to endure the torment of the adjustments that went with it. Austria
>>>was "reunified" in the sense that the occupying powers, and
>>>particularly the Soviet Union, withdrew way back in 1955. As you know,
>>>Austria has had problems recently which have tended to be highlighted
>>>by the support given to Haider and the FPÖ; but I'm not sure that
>>>monetarism has any particular place in this, one way or the other.
>>>I'm not sure either that what Kohl found it necessary to do to manage
>>>the problem of reunification could be identified as "monetarism." What
>>>the ECB does and how its policies can be identified are of course
>>>something else.
>>>The Korean War caused a sharp increase in commodity prices for a year
>>>or so but those prices quickly fell back again. As an example,
>>>Australia experienced a "spike" in demand for its exports in about
>>>1950-51. For the first time, wool sold for a "pound a pound" but it
>>>didn't last. The Communist victory in China in 1949 had a more lasting
>>>effect, for example, on the price of tungsten; and, more generally, on
>>>the intensity of the Cold War in the Asian/Pacific region and the
>>>role, for example, of Japan.
>>>I don't think these developments affected Germany particularly
>>>although the Cold War, NATO, the stationing of American troops in
>>>Germany and so on did have a continuing and substantial impact on
>>>Germany.
>>>But again, I'm not sure what this proves or disproves on whether
>>>Germany followed monetarist policies or not. Bear in mind of course
>>>that the monetarism we're talking about is normally taken to be the
>>>monetarism as advocated and defined by Friedman - however it was
>>>re-defined or practised by others. Friedman's ideas had their main
>>>impact on economic policies from, as I recall, the early to
>>>mid-seventies.
>>>
>>>James Cumes
>>>
>>>
>>>----------
>>> >From: "J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>
>>> >To: <pkt@xxxxxxxxxxxxxxxx>
>>> >Subject: clarifying FOMC
>>> >Date: Tue, Nov 28, 2000, 8:55 pm
>>> >
>>>
>>> >        This responds to James Cumes while
>>> > leaving off the long extra stuff.
>>> >        Certainly the Wirtschaftswunder largely
>>> > took off in the late 40s and early 50s, and I
>>> > would not minimize the Korean War demand
>>> > and the impact of the formation of the EU
>>> > with the associated expanded markets in
>>> > its sustaining after the initial takeoff.
>>> >        Brunner and a lot of others have claimed
>>> > that the FRG and Switzerland followed
>>> > monetarist policies.  I don't know.  Showing
>>> > that the Germans kept interest rates low does
>>> > not disprove the claim that they followed
>>> > monetarism.
>>> >        One factor I can see for the FRG and
>>> > Austria, if not Switzerland so much, is that
>>> > they followed corporatist policies that limited
>>> > wage increases and thus cost-push inflation
>>> > to some degree, arguably a Post Keynesian
>>> > policy approach.   In the FRG this operated
>>> > through the Mitbestimmung co-management
>>> > approach which partly succeeded because
>>> > of the unions' memory of and fear of past
>>> > hyperinflations.  In Austria it took a more
>>> > centralized form.  In the current FRG this has
>>> > clearly broken down.  I am not so sure about
>>> > Austria.
>>> > Barkley Rosser
>>> >
>>>
>>
>>
>>
>>