“cheap” or “dear” money

Friedman’s Dictum by David Glasner

In his link, DeLong quotes 

Friedman never understood that under the gold standard, it is the price level which is fixed and the money supply that is endogenously determined, which is why much of the Monetary History ... is fundamentally misguided owing to its comprehensive misunderstanding of the monetary adjustment mechanism under a convertible standard.

"endogenously determined" - "produced or grown from within."

Endogenous money

Endogenous money creation or destruction is the concept that each participant in the economy has their own version of a 'printing press' for money. This concept was explained by Irving Fisher in his treatise on The Theory of Interest (1930) in terms of the value of currency being affected by two (potentially opposing) movements - expected growth in the money supply reducing the real purchasing powerof money and expected increases in productivity increasing the real purchasing power of money.

This means that participants can affect the value of currency in a number of ways:

• Investment choices to invest in 'non productive' money equivalents rather than to invest directly in productive assets effectively increases the money supply, reducing the real value of currency.
• Demands for higher wages or supplier payments can increase the financing requirements of firms, creating a risk of 'supplier led inflation', effectively reducing the real value of currency.
• Choices made about the level of contribution to productivity can increase the real value of currency, (in fact this is the only mechanism which provides any basis for the real value of currency.)

This all adds up to the conclusion that participants have the power to affect the value of currency, albeit via less direct and potentially less effective mechanisms than simple printing of money by the central bank (exogenous money creation.)

Banks and the Monetary Base (Wonkish) by Krugman

Now, think about what happens when the Fed makes an open-market purchase of securities from banks. This unbalances the banks’ portfolio — they’re holding fewer securities and more reserve — and they will proceed to try to rebalance, buying more securities, and in the process will induce the public to hold both more currency and more deposits. That’s all that I mean when I say that the banks lend out the newly created reserves; you may consider this shorthand way of describing the process misleading, but I at least am not confused about the nature of the adjustment. 

And the crucial thing is that there are no puzzles or misunderstandings here. Tobin and Brainard got it all straight half a century ago, and anyone who thinks that there’s a big flaw in their reasoning is almost surely just getting caught up in his own word games.

Competition for loanable funds

To be able to provide home buyers and builders with the funds needed, banks must compete for deposits. The phenomenon of disintermediation had to dollars moving from savings accounts and into direct market instruments such as U.S. Department of Treasury obligations, agency securities, and corporate debt. One of the greatest factors in recent years in the movement of deposits was the tremendous growth of money market funds whose higher interest rates attracted consumer deposits.^[16]

To compete for deposits, US savings institutions offer many different types of plans:^[16]

• Passbook or ordinary deposit accounts — permit any amount to be added to or withdrawn from the account at any time.
• NOW and Super NOW accounts — function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts.
• Money market accounts — carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance.
• Certificate accounts — subject to loss of some or all interest on withdrawals before maturity.
• Notice accounts — the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal.
• Individual retirement accounts (IRAs) and Keogh plans — a form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal.
• Checking accounts — offered by some institutions under definite restrictions.
• All withdrawals and deposits are completely the sole decision and responsibility of the account owner unless the parent or guardian is required to do otherwise for legal reasons.
• Club accounts and other savings accounts — designed to help people save regularly to meet certain goals.

Buckley red-baiting Samuelson; "there is no such thing as society"

Conservatives don’t get that some problems are public, and it’s hurting them by Mike Konczal

conservative double standards

Schroedinger’s Price Index by Krugman

Apparently Republicans are trying, once again, to extract chain-linking of Social Security benefits as the price of some kind of deal. I have no idea whether this will go anywhere; my guess, or maybe just my hope, is that Obama the Grand Bargainer has vanished from the scene. 

But there’s a funny point I hadn’t thought of until Matt O’Brien pointed it out. The alleged justification for chain-linking is that the conventional consumer price index overstates true inflation; it might overall, but probably not for seniors. In any case, however, as Matt points out, the very same Republicans who claim that Social Security benefits should be cut because the CPI overstates true inflation also insist that the Fed must stop quantitative easing, despite the absence of any visible inflation threat, because the real inflation rate is much higher than the official statistics indicate. 

But Matt, I think, fails to grasp the subtlety of the GOP position here. He accuses them of not knowing what they’re talking about. But surely what’s really happening is that they have a quantum-mechanics view of the situation: the state of the world in which the CPI overstates inflation and the state in which it understates inflation coexist in a condition of superposition, and what happens when you collapse the wave function depends on the position of the observer — that is, whether he’s trying to slash Social Security or bash Ben Bernanke. 

Or, on the other hand, maybe they don’t know what they’re talking about.

AV Club review "ID" from The Bridge

Our Summers of Discontent*

Refereeing the Neil Irwin Bette Midler Debate on Larry Summers by Dean Baker

Things are getting hot and heavy as the battle for Fed succession moves into the second half. Earlier this week, the Washington Post's Fed reporter, Neil Irwin, decided to go head to head with Bette Midler over some unflattering tweets about Larry Summers and his prospects for becoming Fed chair. As a public service, Beat the Press is refereeing the exchange. 

Ms Midler led off with the tweet: 

"HUH. The architect of bank deregulation, which turned straitlaced banks into casinos and bankers into pimps, may be next Head Fed: Summers." 

Irwin took issue with this by pointing out that the Clinton administration, as well as the Bush administration, were filled with proponents of deregulation. This would be people like Robert Rubin, Alan Greenspan and Timothy Geithner. Based on this background Irwin doesn't think it's fair to call Summers "the architect of bank deregulation."

We at Beat the Press have to call this one mostly for Midler. After all, Summers is known to be a forceful character, not just a shrinking violet who sits in the corner of the room. Regulation fans everywhere remember how Summers denounced Raghuram Rajan as a financial luddite for raising the possibility that deregulation might lead to instability in the financial system at the Fed's big Greenspanfest in 2005. 

Summers was a big actor in pushing the deregulation agenda. He deserves credit for his work. If we change Midler's tweet to read, "an architect of bank deregulation," she is 100 percent on the mark. 

Next Midler tweeted: 

"Larry Summers, Mr. De-Regulation, has never stepped forward to say..."Oops! My bad!" Five years of a world wide recession, and not a peep." 

Irwin doesn't dispute this one: no apologies from from Summers. We'll call that a draw.
Then we have Midler tweeting: 

"Larry Summers, a HUGE ADVOCATE of higher exec pay and bonuses for execs whose firms received billions in federal bailouts during the crisis." 

Irwin takes serious issue with this one. He assumes that this refers to the scandal around the hundreds of millions paid out in AIG bonuses even as the company was being kept on life support by the taxpayers. Irwin clearly takes Summers' side here: 

"In the wake of outcry over bonuses to AIG employees, for example, Summers said that the admnistration was trying to stop the bonuses but legally couldn’t. 'Secretary Geithner courageously has gone after these bonuses and will continue to go after these bonuses in a very aggressive way, but we can’t suspend the rule of law and we can’t put the whole economy at risk,' Summers said in a CNN interview. 'It is wrong to govern out of anger . . . we can’t let anger stop us from taking the steps that are necessary to maintain the stability of the financial system, keep credit flowing.' Not quite the same as being a huge advocate." 

We're not buying Irwin's line here. First it is not clear that this is Midler's point of reference. Summers was an advocate of the no questions asked bailout from day one, lobbying the Democratic caucus in September of 2008 to approve the TARP. At that moment, the market was passing judgement on the banks and prepared them to send them to the dustbin of history. 

If there was to be a bailout Congress could have imposed any terms it liked. Instead, Summers insisted that Congress just give up the money with no real conditions, otherwise we would have a second Great Depression. (Sorry, this is nonsense. The first Great Depression was not caused by a financial crisis alone at its start, but rather a decade of inadequate response. Summers surely knows this.) 

Even in the AIG case it is not clear the government could not have forced the bonuses to be taken back. It controlled the flow of money to the company, which it could have ended at any time. Faced with its literal demise, it is likely that the top execs at AIG could have forced substantial reductions in bonuses across the board. 

It's striking that Summers was so concerned about the "rule of law" in this case but seems to show little evidence of concern for the rule of law when it comes to pensions for workers in places like Detroit and Chicago. One could reasonably conclude from his behavior in this and other instances that Summers thinks that high CEO pay and bonuses, even at bailed out companies, is just fine. Beat the Press calls this one for Midler. 

So there you have it, Midler wins 2-0-1. 

Addendum: 

It's possible that in calling Summers a huge advocate of higher exec pay, Midler was referring to the accounts reported in Ron Suskind's book, Confidence Men: Wall Street, Washington, and the Education of a President. In this book, Suskind reports accounts of Summers discussing the market as a tool that exposes natural inequality. In other words, he believed that the large gaps in income that we see reflect differences in intelligence and skills.
That is certainly a plausible reference for Midler's tweet and would provide another reason to score the exchange for Midler.

---------------------------
*Our Summers of Discontent by Maureen Dowd.

Yglesias reverses himself on Glass-Steagall.

DeLong retweets a tweet bashing Dowd's column by Ashak Rao.

Under the Dumb

AV Club reviews "Thicker Than Water" from Under the Dome

Pigou effect and Ricardian Equivalence

Paul Krugman, Ricardian Equivalence, and the Pigou effect by Nick Rowe

WBAI and Doug Henwwod

The Decline & Fall of WBAI by Doug Henwood

Breaking Bad Star Trek story

(via New York Magazine)

Republican blocking minority and "macroprudential policies"

Synthesis Lost by Krugman

... 

First of all, the liquidity trap is real; conventional monetary policy, it turns out, can’t deal with really large negative shocks to demand. We can argue endlessly about whether unconventional monetary policy could do the trick, if only the Fed did it on a truly huge scale; but the fact is that the Fed hasn’t ever been willing, or felt that it had sufficient political room, to do that experiment. 

Second, while the evidence from austerity programs strongly suggests that fiscal policy does in fact work, with multipliers well above one, the political economy of policy turns out to make an effective fiscal response to depression very difficult. 

So the neoclassical synthesis — the idea that we can use monetary and fiscal policy to make the world safe for laissez-faire everywhere else — has failed the test. What does this mean? 

At the very least it means that we need “macroprudential” policies — regulations and taxes designed to limit the risk of crisis — even during good years, because we now know that we can’t count on an effective cleanup when crisis strikes. And I don’t just mean banking regulation; as the authors of the linked paper say, the logic of this argument calls for policies that discourage leverage in general, capital controls to limit foreign borrowing, and more. 

What’s more, you have to ask why, if markets are imperfect enough to generate the massive waste we’ve seen since 2008, we should believe that they get everything else right. I’ve always considered myself a free-market Keynesian — basically, a believer in Samuelson’s synthesis. But I’m far less sure of that position than I used to be.

Are We Doomed? by Ygelsias

the next Fed Chair

Central banking: still a man’s world by Gillian Tett

I'm Not Wild About Larry by Rana Foroohar