L. Randall Wray has been a long-time critic of orthodox monetary economics and US economic policy. Recently he continued his crusade in a paper titled Alternative Approaches to Money [pdf], Theoretical Inquires into Law (11:1), January 2010. Wray is among many Chartalists (Wikipedia) who are active both in published forums and blogs.
Given the state of the world's finances, it seems to me that Chartalist thinking needs to be given a fair hearing — at least an open-forum rebuttal — by "orthodox" economists in academia and government. To date, as Wray notes in the paper, Chartalist thinking has not been given such a hearing.
A fair appraisal of orthodox v. Chartalist thought is especially important since we are into three decades of failed economic policy in the US. A first mistake, according to Wray and others was to base economic reasoning on notions of efficiency and equilibrium, when in fact our financial systems are complex, adaptive systems that are better thought of as "far from equilibruim", at least at some important phase shifts. A second mistake, was to attempt to control complex financial systems via US monetary policy. When money supply control via "monetary targets" failed, the US Fed switched to interest rate targeting. That too failed, Wray claims. Now we are faced with PIIGS that don't fly — at least their currencies don't — and at least five US states that are threatening default. What better time for orthodox economists, along with government policy-makers to think outside the box?
To Wray:
By the end of the 1980s, orthodox policy was also in disarray, as central banks were unable to control the money supply, while money was not closely linked to nominal GDP or to inflation. Furthermore, to many observers it seemed that money matters, in the sense that monetary policy affects unemployment and growth in predictable — even if moderate — ways. Without monetary rules to guide them, central banks cast about for alternatives, including gold prices, real or nominal interest rates, inflation rates, or exchange rates. The overriding belief was that monetary policy somehow is responsible for maintaining the value of money. The trick was to find the right policy rule to maintain a stable value for money.
During the 1990s, orthodoxy developed a "New Monetary Consensus" (NMC) in regard to theory and policy. There are several versions, but all reject monetary targets in favor of interest rate targets. Policy consists of adjusting the overnight interest rate in response to deviations of inflation and output growth from desired performance. Unlike 1960s Keynesianism, fiscal policy plays a small role, while monetary policy controls demand and hence growth. When the economy grows too fast, fueling inflation, the central bank dampens demand by raising interest rates; when it grows too slowly (causing unemployment and deflation), the central bank lowers rates to stimulate demand.
Private banks and financial markets accommodate, following the central bank's lead. The NMC encourages central bank transparency because effective monetary policy requires the cooperation of financial markets; this, in turn, requires consistency of expectations so that central bank intentions can be quickly incorporated in expectations and thus in market behavior, making policy more effective. Further, policy changes are implemented gradually to avoid disruptive surprises that generate instability. In this way, the central bank slows growth and inflation through a limited series of small interest rate hikes — avoiding the problems created in the early 1980s when the Fed raised rates above twenty percent to fight inflation, precipitating the U.S. thrift crisis and developing country debt crises.
The combination of the NMC and the Efficient Markets Hypothesis had a synergistic effect from the mid-1990s until the current global financial crisis. Greenspan was acclaimed as the world's greatest central banker ever. After discovering the NMC as a pragmatic response to the demise of Friedmanian monetarism, he sought to manage expectations to control real world outcomes by building credibility as an inflation-fighting free market proponent. With inflation expectations checked, robust growth became possible without a Phillips Curve tradeoff; growth in turn was promoted through deregulation and reduced government oversight. When self-interested pursuit of profits threatened financial and economic stability, the Fed quickly intervened with the "Greenspan put" — lowering interest rates and arranging a resolution. His replacement, Ben Bernanke, proclaimed the era of "the great moderation": economic stability and better economic policy (at the hands of the central bankers) lowered risks. Innovators further reduced risks by creating financial instruments to hedge and diversify, and to allocate risk to those best able to bear it. Highly complex quantitative models assessed risk so that opaque instruments could be rated. These models, in turn, relied on theoretical advances derived from the efficient markets hypothesis.
It is difficult to convey how much doubt has been thrown on the entire corpus of orthodox theory by the current global crisis. Events rated by models as 25 standard deviation possibilities (once in 100,000 years) have become common. It seems that debt does matter, after all — it is not a good substitute for equity or income — as do leverage and liquidity ratios.
Monetary (interest rate) policy is impotent, although money does appear to be important in the sense that the whole crisis began with deflating nominal values of assets and debts — which generated a run into the most liquid assets. In short, it is hard to see the crisis as an "equilibrium" outcome (Real Business Cycle), as a suboptimal position that resulted from sticky wages or prices (New Keynesian), or as a result of excessive government regulation. Markets never took seriously attempts by Treasury Secretary Paulson or Chairman Bernanke to downplay problems — each new policy announced to deal with the crisis only led to another round of catastrophic collapses. Those outside the discipline legitimately wonder whether economic "science" has advanced at all since the 1930s.
Perhaps it has not. It could be argued that the direction taken by orthodoxy with respect to money was entirely wrong. There was already a viable alternative (with an already long tradition) that was virtually ignored by postwar economists. … [footnotes omitted here]
So is it time yet to get a full airing of Chartalist thinking? And while we are at it, ought we not shed more daylight on the fact that our economic systems, especially our money/credit systems are complex, adaptive systems and ought to be modeled as such.
For those not familiar with Chartalist thinking, I recommend that readers begin with Rogue Economist's Questions About Chartalism and/or Responses to my questions About Chartalism. Decline and Fall of Western Civilization's The Tail Risk to the United States in the GFC is worth a look too.
For even more, see New Economic Perspectives from Kansas City … and beyond.
what no stupid log-in screen, don't mind leaving e-mail
The issue is not that this is wrong or that. The issue is fundementaly that Buissness or capitiliism controls America politics. As long as Government is beholding to buisness can we expect washington to solve anything, that was rehotorical, of course not.
the economny is about jobs, nothing else matters. health reform will remain under funded, realestate remains depressed and the finacial markets will continue to fluctuate ending in a crash
without jobs we can not have a viable energy, transportation, scientific or any research project become marketable. Why is jobs so important. Capitalism is all about employment and growth, but more about employment.
How is it that most (not all) econo-blogs have some solution without takining in account of job creation. They may state some aspect of jobs, but lacks any real solutions. Where can we find such solution, History of course
History is not a panacea however, what worked then might not work today. Take Reagon-nomics for example, trickle down worked because US, by in large had a viable manufacturing base. There was there was a job available to trickle from. Moderen socities have been through enough that a scenario can be found that we can relate to for today. Their just happens to be two to be exact, Civil war and WWII
So if we expect a solution then the easiest way of course is to have an all enclusive war OR find something else to fight over. The winner of this new war controls the world. By the way US. is loosing big time
thats my pitch contact me for my offer
Posted by: TSQUARE21 | March 13, 2010 at 02:12 PM