Re: interest rates and investment, reply to Barkley and Matt

[Leonardo Vera <lvera@xxxxxxxxx>]

At 12:07 p.m. 16/11/01 -0800, you wrote:
> You folks probably are familiar with Minsky's neat little diagrammatic and
>mathematical model of investment, but if not perhaps take a look.  It
>incorporates both borrowers'and lenders' risk, and shows how quickly
>investment demand can collapse when interest rates rise...it is I think
>first published in his John Maynard Keynes.  It  can be used to illustrate
>how simply lowering rates doesn't necessarily lead to more investment as
>well.
>
>Chris


Chris,  then you mean that a rise in the interest rate (caused by fical
policy, for instance) will offset private investment (crowding
out).....ummm.. would you support that?. But anyway I believe the original
concern was with the association of high interest rates and credit crunch.
Does this association exist?...If we believe so, (and I think we have a lot
of that in many countries today), then we need to know what sort of
transmission mechanism operates.

I think we have to untangle loan supply shocks from disturbances to loan
demand. Decreases in bank lending can occur either because weakned firms
demand for credit or because banks are cutting back loans. Also it can be
useful to differentiate between the interest rate channel and the bank
lending channel. A look at the interest rate-investment relationship would
emphasize the traditional interest rate channel. But this is just one story.

When huge amounts of government securities are used to finance fiscal
deficits, higher interest rates, by weakening the state of borrowers'
balance sheets, may may reduce the demand for credit. But also banks can
find that government securities are more attractive options than loans.
They just substitute assets in higher risk categories into assets in lower
risk categories. So this allocation of credit away from commercial loans
may contribute to the credit crunch. I believe this lending channel view
could be much more interesting to post-keynesians than the interest rate
view. Besides, post-keynesian economics will not fully endorse the idea
that interest rate changes have a singnificat effect on investment. Since
the 1938 Oxford reserach group study, this strong association has been
rejected many times.

Leonardo Vera


>-----Original Message-----
>From: J. Barkley Rosser, Jr.
>To: Forstater, Mathew
>Cc: Post Keynesian Thought
>Sent: 11/15/01 12:02 PM
>Subject: Re: OCC
>
>Mat,
>      This is a good point to make.  In the usual
>"pushing on a string" (or "trying to make the
>horse drink" (after leading it to the water)) it
>is the lack of animal spirits of the borrowers/
>real capital investors that is represented by the
>limpness of the string or the horse that refuses
>to drink.  But the lenders refusing to lend is the
>pulling on the string or the holding the horse back
>from the water so that it cannot drink.
>     Of course, policy can do this also, as in the
>case of the OCC, which is apparently pulling on
>the string (and also the reins of the horse).
>Barkley Rosser
>----- Original Message -----
>From: "Forstater, Mathew" <ForstaterM@xxxxxxxx>
>To: "J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>; "Rakesh Bhandari"
><rakeshb@xxxxxxxxxxxx>
>Cc: "Post Keynesian Thought" <pkt@xxxxxxxxxxxxxxxx>
>Sent: Thursday, November 15, 2001 2:03 PM
>Subject: RE: OCC
>
>
>Keynes gave another reeason for the assymmetric response to interest
>rate hikes and cuts--one that follows from recognizing that it is not
>only the expectations of investors, but also lenders, that affect
>decisions that depend on external finance.  Investors and lenders must
>both have rosy expectations to make investment a "go," while it only
>takes one or the other having negative expectations to make it a "no."
>Does that make sense?
>
>By the way, I am very interested in this topic, so anyone with refs to
>more on this I'd appreciate it.  Are there and PK discussions of
>different interest-elasticities of investment or credit demand, kinked
>schedules, etc?
>
>-----Original Message-----
>From: J. Barkley Rosser, Jr. [mailto:rosserjb@xxxxxxx]
>Sent: Thursday, November 15, 2001 8:59 AM
>To: Rakesh Bhandari
>Cc: Post Keynesian Thought
>Subject: Re: OCC
>
>
>Rakesh,
>      I think the inability of central banks to stimulate
>economies in deep downturns goes way beyond
>the peculiar institution of the OCC.  Keynes made
>the old argument about "pushing on a string" in an
>environment where there was no such entity, and
>the general asymmetry between monetary and
>fiscal policy in these matters seems very general.
>      OTOH, the OCC and its policies certainly
>exacerbates this more general tendency in the US.
>Barkley Rosser
>----- Original Message -----
>From: "Rakesh Bhandari" <rakeshb@xxxxxxxxxxxx>
>To: <rosserjb@xxxxxxx>
>Sent: Wednesday, November 14, 2001 10:25 PM
>Subject: OCC
>
>
>> Barkley,
>> this is very interesting indeed. there was an editorial in the wsj
>about
>this
>> last week; emphasized that this agency was basically forcing banks to
>hold
>govt
>> securities while in effect cutting off lines of credit to smaller
>businesses
>> especially.
>>
>> by the way,  does this automatic triggering explain why the fed is
>better
>at
>> killing booms than reversing downturns? that is, while rate hikes cool
>off
>the
>> economy, rate cuts are neutralized by this OCC counter-action?
>>
>> Rakesh
>>
>>
>>        Another factor that is related to this although
>> partly exogenous in the U.S. are regulations on
>> loans quality by the Comptroller of the Currency,
>> a little known agency located in the U.S. Treasury.
>> This entity can declare that a bank has bad loans
>> and in conjunction with the requirements to have
>> not too many bad loans can force banks to reduce
>> their lending.  Thus, even though the Fed is striving
>> mightily to engage in stimulative monetary policy,
>> it is being offset to a significant degree by the OCC
>> that is ordering banks to reduce loans because of
>> all the bad loans they have on their books, many of
>> these in the now collapsed dot.com sector.
>>       The irony is that it is an economic decline that has
>> made these loans bad.  This turning of good loans into
>> bad ones then essentially automatically triggers this
>> regulatory reaction that induces a tendency to a
>> contractionary monetary policy, despite the efforts of
>> the Fed.  Some in Congress are now calling for the OCC
>> to be put under the Fed exactly to avoid this kind of
>> absurd impasse.
>> Barkley Rosser
>>
>>
>>
>>
>
>
>
>

_____________________________
Leonardo  Vera
Universidad Central de Venezuela
FACES, Escuela de Economía
Caracas, 1050
Venezuela.