Just FYI, Scott Sumner posted this today, which is sort of indirectly relevant. Scott is the person I absorbed my view of monetary policy from and the article references several other people (George Selgin, Bennett McCallum) with similar views.
Thank you for the interesting responses to my comment. I think I understand the difference of perspective here.
In my view, which is basically monetarist, monetary policy, the buying and selling of assets for base money, is sufficient to control inflation and liquidity and should be used only to control inflation and liquidity. While central banks do many things, only operations than involve base money are actually monetary policy. The operation of monetary policy to control inflation and liquidity should be as technocratic and automatic as possible and should not concern itself with its impact on government debt or anything else. This is a normative prescription, with a positive theory behind it, that a stable but slightly inflationary medium of exchange minimizes menu costs and so helps overall economic efficiency and therefore wellbeing. The Fed does not quite function according to these rules, but it, and other modern central banks, are reasonably close.
MMT does not agree with this normative prescription. From the MMT point of view, constraining government policy to create money that is only slightly and predictably inflationary constrains the government to an excessive degree. Governments should simply spend freely and then use tax and debt issuance to control inflation. From my perspective this is foolish - treating monetary policy as a separate, independent, technocratic function of government serves a disciplining function, not just controlling inflation but also preventing the government from eating the private sector by co-opting a larger and larger share of national savings.
I think you are going beyond this and saying that the central bank should prioritize this discipling function beyond simply maintaining the value of money and into ensuring that the government is exposed directly to the private sector's willingness to lend it money, going beyond monetary policy and into the domain of its wider credit facilities. The various credit facilities established during COVID are not monetary policy because they were funded - no new money was added to the system through that channel. Your concern seems to be that because monetary policy and wider credit policy is usually conducted using government securities it effectively monetizes the debt even if that is not the intent, and there is a possibility of its being used explicitly to monetize the debt. I would point out here that QE2 and I think also QE3 bought private label MBS and so they can't be seen as directly monetizing the debt.
My response to this basically is that if the Fed sticks to its mandate eventually the chickens will come home to roost, as indeed they are doing. Regardless of how you characterize Fed policy over the past 20 years, the government now faces real constraints on its ability to borrow that it needs to face. The democratic process has to deal with this, hopefully by dealing with healthcare costs and reaching a compromise on social security. But Congress is dysfunctional, so ...
The problem with MMT is that it depends on responsible governments. They won't behave well, and there's no alternative when that happens. They can pull a Japan and kick the can for longer than you or I will live, but the bottom line is fertility. And although the mainstream hasn't acknowledged that link, east Asia will be long depopulated, and the rest of the modern world with it, before the system collapses.
And an MMTer would come back with socialist solutions for fertility, but then we're literally starving instead of financially drowning. Fantastic.
"The Fed had choices at every step. QE1 was a crisis response. QE2 and QE3 were unequivocally not — they came at times of near-full employment, markets functioning quite well, and long after the immediate crisis had already been resolved."
I take issue with this rather Pollyannish characterization of the economic context surrounding quantitative easing (and post-GFC economic performance more generally). Sure, when QE2 came around (c. 2011-12), economic growth was positive (although it was remarkably low) and capital markets had been restored to something resembling stability (excluding the GOP-imposed debt ceiling crisis of August 2011), but the economic crisis generated by the Great Recession was far from over. Unemployment remained high (U-3 stood at about 8.5% in December 2011, whereas full employment is generally around 4%), growth was lackluster (hence the term “jobless recovery” and calls for additional fiscal stimulus), and there was nothing to suggest that additional fiscal stimulus would be forthcoming (especially after the Republican electoral sweep in 2010). The same could be easily said for QE3 (c. September 2012): U-3 was 7.8%, growth was still lackluster, no fiscal stimulus was likely forthcoming, and unemployment didn’t return to “near-full employment” levels until at least October 2015 (when U-3 hit 5%). Under the dual mandate, the Fed had ample reason to be concerned about the weak economy, given how elevated unemployment was and fears that it would scar the economy in the long run.
This is not to suggest that I support MMT (I don’t, and Doug Henwood provides a rather devastating left-wing critique here https://jacobin.com/2019/02/modern-monetary-theory-isnt-helping). I just don’t buy the idea that QE2 and QE3 were ill-timed, let alone a policy mistake of epic proportions.
"Money is a legitimacy system built on a constraint stack. You can suppress the constraint for a while. You cannot repeal it."
Yeah, that's a good line
Just FYI, Scott Sumner posted this today, which is sort of indirectly relevant. Scott is the person I absorbed my view of monetary policy from and the article references several other people (George Selgin, Bennett McCallum) with similar views.
https://substack.com/home/post/p-196937107
Thank you for the interesting responses to my comment. I think I understand the difference of perspective here.
In my view, which is basically monetarist, monetary policy, the buying and selling of assets for base money, is sufficient to control inflation and liquidity and should be used only to control inflation and liquidity. While central banks do many things, only operations than involve base money are actually monetary policy. The operation of monetary policy to control inflation and liquidity should be as technocratic and automatic as possible and should not concern itself with its impact on government debt or anything else. This is a normative prescription, with a positive theory behind it, that a stable but slightly inflationary medium of exchange minimizes menu costs and so helps overall economic efficiency and therefore wellbeing. The Fed does not quite function according to these rules, but it, and other modern central banks, are reasonably close.
MMT does not agree with this normative prescription. From the MMT point of view, constraining government policy to create money that is only slightly and predictably inflationary constrains the government to an excessive degree. Governments should simply spend freely and then use tax and debt issuance to control inflation. From my perspective this is foolish - treating monetary policy as a separate, independent, technocratic function of government serves a disciplining function, not just controlling inflation but also preventing the government from eating the private sector by co-opting a larger and larger share of national savings.
I think you are going beyond this and saying that the central bank should prioritize this discipling function beyond simply maintaining the value of money and into ensuring that the government is exposed directly to the private sector's willingness to lend it money, going beyond monetary policy and into the domain of its wider credit facilities. The various credit facilities established during COVID are not monetary policy because they were funded - no new money was added to the system through that channel. Your concern seems to be that because monetary policy and wider credit policy is usually conducted using government securities it effectively monetizes the debt even if that is not the intent, and there is a possibility of its being used explicitly to monetize the debt. I would point out here that QE2 and I think also QE3 bought private label MBS and so they can't be seen as directly monetizing the debt.
My response to this basically is that if the Fed sticks to its mandate eventually the chickens will come home to roost, as indeed they are doing. Regardless of how you characterize Fed policy over the past 20 years, the government now faces real constraints on its ability to borrow that it needs to face. The democratic process has to deal with this, hopefully by dealing with healthcare costs and reaching a compromise on social security. But Congress is dysfunctional, so ...
The problem with MMT is that it depends on responsible governments. They won't behave well, and there's no alternative when that happens. They can pull a Japan and kick the can for longer than you or I will live, but the bottom line is fertility. And although the mainstream hasn't acknowledged that link, east Asia will be long depopulated, and the rest of the modern world with it, before the system collapses.
And an MMTer would come back with socialist solutions for fertility, but then we're literally starving instead of financially drowning. Fantastic.
"The Fed had choices at every step. QE1 was a crisis response. QE2 and QE3 were unequivocally not — they came at times of near-full employment, markets functioning quite well, and long after the immediate crisis had already been resolved."
I take issue with this rather Pollyannish characterization of the economic context surrounding quantitative easing (and post-GFC economic performance more generally). Sure, when QE2 came around (c. 2011-12), economic growth was positive (although it was remarkably low) and capital markets had been restored to something resembling stability (excluding the GOP-imposed debt ceiling crisis of August 2011), but the economic crisis generated by the Great Recession was far from over. Unemployment remained high (U-3 stood at about 8.5% in December 2011, whereas full employment is generally around 4%), growth was lackluster (hence the term “jobless recovery” and calls for additional fiscal stimulus), and there was nothing to suggest that additional fiscal stimulus would be forthcoming (especially after the Republican electoral sweep in 2010). The same could be easily said for QE3 (c. September 2012): U-3 was 7.8%, growth was still lackluster, no fiscal stimulus was likely forthcoming, and unemployment didn’t return to “near-full employment” levels until at least October 2015 (when U-3 hit 5%). Under the dual mandate, the Fed had ample reason to be concerned about the weak economy, given how elevated unemployment was and fears that it would scar the economy in the long run.
This is not to suggest that I support MMT (I don’t, and Doug Henwood provides a rather devastating left-wing critique here https://jacobin.com/2019/02/modern-monetary-theory-isnt-helping). I just don’t buy the idea that QE2 and QE3 were ill-timed, let alone a policy mistake of epic proportions.