Austrian School: Crap/Not Crap?

[love detective]

sorry but there's a lot of misleading & confused information being put forward in the last three posts - the first two pages of this thread have been some fairly detailed discussions around these very things where i tried to go back to the basics to argue against , i.e.

i) the incorrect assertion that banks create money 'from thin air' (and that Keen somehow proves this),
ii) the equally incorrect assertion that money can be created simply by revaluing assets,
iii) the necessity of circulation and it's relationship to fractional reserve lending ,
iv) endogenous money theory etc. - there was also some fairly length responses addressing ItWillNeverWork's points about Keen

there's not much point me responding in any detail to what i disagree with in the three posts above as I already done so in the first two pages of this thread when the same points were made earlier (and on numerous other money/value threads over the last year or so), so i'll scrap the usual lengthy responses as they are already here on the thread - in short though all these things come down to the necessity of circulation/flow/movement and in this case a misunderstanding of it

(poor response re Smith as well LBJ - and i think conflating the usage of christian morality as political cover by politicians with the same thing happening to serious total philosophers like Adam Smith is pretty poor - to put forward the notion that someone like Adam Smith could write two completely contradictory tracts at the same time is absurd and shows little understanding of his work - also Smith, like Hume, was most probably an atheist so he had no need for parroting christain morality for the sake of it like dead dogma - can't be arsed getting dragged into a discussion about it though)

 

[butchersapron]

Minsky is interesting but flawed. He takes the basic 'model' model of capital as his start point which immediately puts him in the economists camp. His emphasis is almost totally on a small part of the overall cycle and gives it the key determining influence - and all this is done through looking from above and through the acts of institutions - which is how he could argue for the dismantling of the classic welfare state, he could never see it as coming from the accumulated victories of the labour movement, but just as an act of capital. He's a much cited name today but i think people might be rather surprised at what he actually argues in his work.

 

[littlebabyjesus]

to put forward the notion that someone like Adam Smith could write two completely contradictory tracts at the same time is absurd and shows little understanding of his work

I don't think they're contradictory. I also did not suggest he was 'parrotting christian morality for the sake of it'! There is a very great deal in christian morality that is very laudable - and that is the tradition I see Smith following, very solidly. That he was probably an atheist is irrelevant. I don't really want to discuss it either, but that is a caricature of what I said.

As for the 'misleading and confused information', I'm pretty sure I've represented Minsky and Keen's positions fairly accurately. It makes sense to me. A lot of sense.

 

[love detective]

for a start, you're still talking about money being created out of thin air by commercial banks (and positing that other things apparently prove this, when they do no such thing and are not even related to the point you are trying to 'prove') - you haven't taken on aboard a thing that has been said on this thread against this notion or the other stuff

as i've said before, it's pointless discussing this stuff with you as you never engage with any of the detail of the points which are put forward which negate the validity of your assertions - you just leave it for a few months and come back with the same garbled & confused assertions - you project a level of knowledge & understanding of these things that simply isn't there

 

[littlebabyjesus]

You patronising arse. How about you address points. If I've misunderstood Minsky and Keen it should be pretty easy to show me how.

 

[love detective]

why don't you argue against/address the points i've made in the first two pages of this thread (all of which relate to, and argue against, the stuff you've put forward in the last few posts) - instead of just asserting after i've made them, something that goes against them but refusing to engage with any of the detail of it

while i think my points are correct, i don't expect anyone else to - i do however expect them to engage with them if they are going to argue things which contradict them - not like what you do, ignore them and re-assert what you think and then demand everyone addresses what genuis you've come out with

I'll leave you to it

 

[littlebabyjesus]

This from Steve Keen shows that I am not misunderstanding him. It actually goes further than what I said in that it considers the money multiplier model not to be at all the system we have - Keen doesn't think that money is created by governments at all - governments merely react to the creation of credit by banks in order to avoid recession.

If the entire banking system is at its reserve requirement limit, then the Federal Reserve has three choices:

• refuse to issue new reserves and cause a credit crunch;
• create new reserves; or
• relax the reserve ratio.

Since the main role of the Federal Reserve is to try to ensure the smooth functioning of the credit system, option one is out—so it either adds Base Money to the system, or relaxes the reserve requirements, or both.
Thus causation in money creation runs in the opposite direction to that of the money multiplier model: the credit money dog wags the fiat money tail. Both the actual level of money in the system, and the component of it that is created by the government, are controlled by the commercial system itself, and not by the Federal Reserve.

Central Banks around the world learnt this lesson the hard way in the 1970s and 1980s when they attempted to control the money supply, following neoclassical economist Milton Friedman’s theory of “monetarism” that blamed inflation on increases in the money supply. Friedman argued that Central Banks should keep the reserve requirement constant, and increase Base Money at about 5% per annum; this would, he asserted cause inflation to fall as people’s expectations adjusted, with only a minor (if any) impact on real economic activity.

Though inflation was ultimately suppressed by a severe recession, the monetarist experiment overall was an abject failure. Central Banks would set targets for the growth in the money supply and miss them completely—the money supply would grow two to three times faster than the targets they set.

You don't have to address my points if you don't want to. Calling them 'garbled and confused assertions' suggests to me that you haven't understood them, though.

 

[ItWillNeverWork]

why don't you argue against/address the points i've made in the first two pages of this thread

In this post you said:

...the central bank can influence the money supply in various ways and to various levels of success (as we are seeing at the moment) but it does not 'control' it as Keen suggests that exogenouists claim. Just as actors outside of the central bank can also influence the money supply in various ways and to various levels of success through their economic activity (as we are also seeing at the moment), but they also do not exert full control over it.

Could you go into a bit more detail about how you see economic actors influencing the money supply?


You also wrote:

For the people who claim that commercial banks can create money at will, they have to explain why, when money was desperately needed to survive, they didn't just create it at will in the manner in which it has been suggested they can? If any answer to this question is met with a claim that, oh the conditions weren't right, or confidence had been lost or whatever, then it clearly pulls the rug form under the feet of the claim that they can create money at will, as this shows that this money creation process relies upon something else, something that is not achieved by typing on a keyboard, something that the bank can't just magic into existence.

But I'm not sure Keen is claiming that banks have total control over the money supply at all times. In fact, key to his description of crises seems to be that any limited control that banks may have under certain conditions, cease to prevail in crisis times. In other words, circulation is key, and it is the inevitable interruption of this circulation that signifies the onset of the crisis, and the impotence of banks to continue to extend credit as they did previously

 

[camouflage]

Someone deposits £1. Lend out 90% of the £1 deposited, put 10p in the reserves. Get the 90p on deposit from the borrower, lend out 90%, put 9p in the reserves. You eventually end up with the original £1 in the reserves. Count things that shouldn't be counted as cash as a cash deposit, and you can lend out more than 100% of cash deposits and the amount of liability compared to assets spirals out of control.

I agree with this... plus the asset prices themselves spiral out of control when a sort of 'institutional exhuberance' says every paper-sausage thought up by some vampire-squid somewhere is indeed worth it's weight in bricks.

To my mind attempts to control money are like an attempt to control human-ingenuity itself. I wonder how much of an effect Ratings Agencies have on this process, if they say something is AAA, they have effectively given it Credit right?

 

[littlebabyjesus]

But I'm not sure Keen is claiming that banks have total control over the money supply at all times.

In the article I linked to above, Keen addresses the idea that the Federal Reserve was responsible for the Great Depression, when the money supply contracted massively. He says that they weren't - the contraction was simply the response of people paying down their debts and not wanting to take out new loans, because the confidence to do so had gone. In that sense, banks don't have control of the money supply - the money supply is limited by the willingness of people to borrow.

 

[love detective]

as i said, i'll leave you to it LBJ, you can read what i've written or not (and you can take it onboard or not)

you're probably right, i probably don't understand it, i mean why would I

although i've noticed some of the things you've said in the last post or two seems to recognise the importance of what i'd been talking about earlier (circulation being key, banks being the dependent variable, not the independent variable) so you at least seem to have taken some of these things on board (even if you do present them as though they are arguing against what i say

but i have not the time/energy to continually repeat my points for your own convienience - you're not that special

 

[littlebabyjesus]

I could throw everything you say back at you, you know. You accuse me of not understanding yet take offence when I suggest the same to you. I'd like you to show me a 'garbled and confused assertion' I've made in the last couple of pages.

And yes, I have taken on board a lot of what you've said, which is reflected in what I've been saying on this thread. There is a fundamental disagreement here, though, about how money is created. If you read the Keen article, he talks about the predictions about how a 'deposit-first' system would work and compares them to reality - in particular, he shows how the total debt exceeds total money by quite a distance, something that can't happen in a 'deposit-first' system.

Keen/Minsky provide a lot of detail here. They explain the system and the mechanisms by which it works, and their explanation of the system explains the credit crunch, the failure of monetarism, the comparative levels of debt and how it can expand, the contraction in the money supply during the Depression, the failure of quantitative easing to have much of an impact on the economy. I find this a very compelling case.

 

[ItWillNeverWork]

but i have not the time/energy to continually repeat my points for your own convienience - you're not that special

Am I special enough to get your attention?

 

[laptop]

i) the incorrect assertion that banks create money 'from thin air' (and that Keen somehow proves this),

Is it relevant here that the restriction on banks "creating money" is regulatory?

I know it's not strictly a response to the argument, which is about misunderstandings of what happens when the system is operating according to "the rules".

But what stops a bank "tapping a few keys" is a web of rules - Basel rules on reserves down to audit and disqualification of directors. Isn't it?

 

[littlebabyjesus]

That was my question earlier, effectively - do complex financial instruments disguise the fact that credit is being created before deposits?

The thing is that Keen provides empirical evidence that this does in fact take place - whether or not it is supposed to. He also provides suggestions as to how - for instance, the 'lines of credit' that are extended to businesses, which allow them to borrow as and when needed. The fact that central banks - as a matter of course - expand the base money supply pretty much constantly anyway could well disguise the real picture, and again, the empirical evidence suggests that it does: credit comes before reserves.

 

[ItWillNeverWork]

Would it be fair to say that money is endogenously created via the extension of lines of credit, but that this process of creation is contingent on there being circulation of money in the correct proportions and in the right places?

 

[love detective]

Is it relevant here that the restriction on banks "creating money" is regulatory?

no - it's not regulatory restrictions that are important here on (this is one of the things I try to argue against when people refer to fractional reserve lending as though it's just some legal restriction that stops certain things happening) - what restricts banks creating money out of 'thin air' is the necessity for things independent of that bank's control to happen prior to them being able to extend credit, i.e. things have to circulate

But what stops a bank "tapping a few keys" is a web of rules - Basel rules on reserves down to audit and disqualification of directors. Isn't it?

again no - what stops banks tapping a few keys and creating money is the fact that the material conditions that are required to be present for a bank to extend credit are outwith the control of the bank itself - they can take part in the circulation of credit (including the step of tapping a few keys) if all the other things that need to be in place are in place - if they're not they can't

 

[littlebabyjesus]

If I understand correctly, the process of interbank lending allows the system as a whole to operate like this, allowing you to look at the system as a whole. If, for instance, banks are supposed to keep 10 percent in reserve, then from a starting point with that 10 percent, credit-led money creation would steadily erode that reserve. The central bank response is to create more base money. But effectively, the extension of credit is what drives the circulation - as creating credit is also creating a deposit. As I understand it, this is how the 'endogenous money' theory operates.

Keen actually models a system of pure credit with no central bank money creation at all. Such a system can exist - so long as the lines of credit are constantly expanded.

 

[ItWillNeverWork]

If I understand correctly, the process of interbank lending allows the system as a whole to operate like this, allowing you to look at the system as a whole. If, for instance, banks are supposed to keep 10 percent in reserve, then from a starting point with that 10 percent, credit-led money creation would steadily erode that reserve. The central bank response is to create more base money. But effectively, the extension of credit is what drives the circulation - as creating credit is also creating a deposit. As I understand it, this is how the 'endogenous money' theory operates.

Keen actually models a system of pure credit with no central bank money creation at all. Such a system can exist - so long as the lines of credit are constantly expanded.

That is pretty much how I understand Keen's argument. I do not seewhy this is in conflict with ld's assertion that circulation is important. Surely the ideas compliment each other, or at least are not mutually exclusive. Like I say, money is endogenously created via the extension of lines of credit, but that this process of creation is contingent on there being circulation of money in the correct proportions and in the right places.

Maybe ld can respond to this point?

 

[love detective]

I'd like you to show me a 'garbled and confused assertion' I've made in the last couple of pages.

Here's two for starters

are the new complex financial instruments in fact hiding the truth - which is that the money for the loans was created out of thin air

on the back of notional asset prices

For the first one, the first couple of pages of this thread was spent talking about this - you ignored all of it to come back and just repeat the assertion that money is created by commercial banks out of thin air

The second one, i'd like to point out as a classi example of your approach to 'debate' on things like this:-

On 16th December you stated the following

One can 'create' money by revaluing one's assets upwards, can one not?

I replied on the same day

No - and again this is making a similar mistake to IWNW

You can revalue your assets upwards to your hearts desire but in and off itself (just like IWNW's banks hammering away on their keyboards) it won't create a bean of money (try it now and see what happens)

If however you have an asset, and then for whatever reason (and due to circumstances, at least in part, external to you) the future income stream from that asset is expected to be more than previously expected, then you may be able to use the increased value of the asset as collateral to obtain credit. But only at that stage is credit money 'created' - and in turn whoever extends that credit to you has to do more than just tap away on their keyboard, they have to first agree with your valuation of the asset pledged as collateral and secondly be able to fund the extension of credit to you (alternatively, instead of borrowing against the value of the asset, you could just sell the asset outright to someone but the same conditions still apply - the other party has to source the funds from somewhere and need to agree with your valuation).

But for any of this to happen, the trigger is not one just revaluing one's assets upwards. Revaluing your assets upwards (just like the tapping away on the keyboard at the bank to transmit credit to a customer) is an activity which requires a 'material' basis for it to happen - it's a reflection of something that has happened elsewhere, it's the dependent not independent variable in the process, it's the consequence of an event not its cause.

So you can't just arbitrarily revalue an asset upwards and this in and off itself 'creates money'. Even if the revaluation of the asset is an accurate reflection of an actual increase in its worth (i.e. an increase in the future discounted cash flows expected from it) - this still doesn't lead to the 'creation of money' - only if that increased asset value can be used to effect a credit transaction with another party who can fund the lending, is credit money then actually 'created'

Also revaluing an asset upwards in and off itself doesn't create ficticious capital in the marxist sense - only when the process described above starts to happen, when the titles to, or claims on, those assets (whether revalued upwards or not) start circulating independently of the asset they relate to, does fictitious capital come into being

Now as is your usual approach - you didn't respond to any of the above - however a few months later you then come back, ignoring the points that were made to you, and make the same assertion, that money can be created by simply revaluing assets

Keen/Minsky provide a lot of detail here. They explain the system and the mechanisms by which it works

And earlier on this thread, ITWN put forward a paper by Keen which was used to back up the case that money could be created out of thin air by commercial banks - I read it, engaged with it, and argued against it and showed (in my mind anyway) that he had done no such thing

You also accuse me of attempting to shut down debate - all I can say that it's a pretty flawed attempt on my part to shut down debate by pointing you towards posts on a thread that are relevant to points you are making and asking you to engage with the points that had been made prior to your contributions - it's an odd way to shut down debate by asking you to engage with and debate stuff is it not?

I admit I may have been rude and vigorous in some of my posts - and that's not due to frustration of you not accepting my points, but of frustration of you continually ignoring the time & effort that people put into responding to your points, and time and time again just coming back and repeating the same baseless assertions, avoiding the addressal of any points that have been put forward in respond to your assertions

Now, seriously that's the last on this from me - i apologise if I was rude or disrespectful - but i do have better things to be doing than this, so i'll leave you to it

 

[ItWillNeverWork]

I guess I'm just not that special.

 

[littlebabyjesus]

I admit I may have been rude and vigorous in some of my posts - and that's not due to frustration of you not accepting my points, but of frustration of you continually ignoring the time & effort that people put into responding to your points, and time and time again just coming back and repeating the same baseless assertions, avoiding the addressal of any points that have been put forward in respond to your assertions

I don't see them as baseless assertions. The post by you that you quote in this post appears to me to be a direct contradiction of what Keen says, to be exactly what Keen is arguing against. He provides empirical evidence to back this up, and makes what is to my mind a compelling case.

You disagree with this, it appears. But you haven't convinced me with your argument. You accuse me of not reading your arguments, but I have - carefully. And what I've been trying to do in the last couple of pages is to provide some base for the suggested mechanism (not assertions - you repeatedly misinterpret questions from me as assertions).

 

[love detective]

again i have no will power

The thing is that Keen provides empirical evidence that this does in fact take place

Keen shows that money within the monetary system circulates - he doesn't show that money is created out of thin air as part of that process

money can circulate, creating the loans/obligations/'new money' that it leaves in its trace, without increases in central bank money. this is a very basic fact of the monetary system (something that has also been discussed in detail in the earlier pages of this thread). So to show that empirically the money supply races ahead of (proportionally) existing base central bank money, doesn't prove anything near the assertion that money is created out of thin air by a few taps on the keyboard (as you suggest) - all it proves is the a priori fact that at times of increased circulation/activity the supply of money increases, and that supply is not dependent on central bank money to do so. The regulatory aspect of what or how much reserve needs to be held back is not the important thing here in terms of getting to the fundamentals of how things work - the regulatory aspect can hamper/intervene the fundamentals of how it works but it doesn't create those fundamentals

If there was no requirement to keep any reserves (i.e. the 10% referred to above) this wouldn't magically allow banks to create money out of thin air - all it would mean is that they could lend out £100 for every £100 they got in - if they wanted to lend out £110 for every £100 they got in, then there's no amount of tweaking with regulatory/legal things that could make this happen - no more than you or I could magically lend £10 to someone that we don't have

 

[love detective]

Keen actually models a system of pure credit with no central bank money creation at all. Such a system can exist - so long as the lines of credit are constantly expanded.

Austrian economists and general equilibrium theoryists model all kinds of systems that suggest in theory their preferred systems can exist - hell even communists do - i'm not sure what this is meant to prove though. (edit: maybe the european banks who had to borrow just over a trillion euros from the ECB in Dec 11/Feb 12 should also have paid more attention to the theories of Keen)

which leads to the commonly used phrase that if only the world behaved like it does in their textbooks then everything would be ok

 

[love detective]

I guess I'm just not that special.

sorry mate - you are special, very special in fact - but i'm really trying not to get dragged into this as I always end up spending too much time on it

 

[ItWillNeverWork]

sorry mate - you are special, very special in fact - but i'm really trying not to get dragged into this as I always end up spending too much time on it

Maybe just a small response to post #106?

Yours, the special fella.

 

[love detective]

I don't see them as baseless assertions. The post by you that you quote in this post appears to me to be a direct contradiction of what Keen says, to be exactly what Keen is arguing against. He provides empirical evidence to back this up, and makes what is to my mind a compelling case.

You disagree with this, it appears. But you haven't convinced me with your argument. You accuse me of not reading your arguments, but I have - carefully. And what I've been trying to do in the last couple of pages is to provide some base for the suggested mechanism (not assertions - you repeatedly misinterpret questions from me as assertions).

can you put forward a simple explanation for me then, showing how money can be created by simply revaluing one's assets then?

i've set out why, and in my own words, I don't consider that to be the case - can you explain to me in your words why you think it is the case? There's a lot of 'Keen says' cropping up lately, but a lot of it doesn't seem to be to closely connected to what you are arguing - so put Keen aside for the time being (or put him into your own words) and tell me what is incorrect about my post to you arguing against your assertion that money can be created simply by revaluing one's assets?

 

[love detective]

Would it be fair to say that money is endogenously created via the extension of lines of credit, but that this process of creation is contingent on there being circulation of money in the correct proportions and in the right places?

yes - i would say though that the extension of credit is part of the process (a series of steps say) that is required for the money supply to be increased - but you pretty much cover this in your references to the contingencies of the process

As i mentioned further back on this thread though - that this happens is in no way in contradiction with fractional reserve lending or exogenous money theory (the creation of money endogenously is a fundamental part of even exogenous money theory) - it just shows that money circulates within and around the system and leaves in its trace a trail of loans/obligations

 

[ItWillNeverWork]

yes - i would say though that the extension of credit is part of the process (a series of steps say) that is required for the money supply to be increased - but you pretty much cover this in your references to the contingencies of the process

As i mentioned further back on this thread though - that this happens is in no way in contradiction with fractional reserve lending or exogenous money theory (the creation of money endogenously is a fundamental part of even exogenous money theory) - it just shows that money circulates within and around the system and leaves in its trace a trail of loans/obligations

Ok, thank you for your reply. All of that makes complete sense. Linking this back to the topic of Austrianism, it seems to me that the Austrians believe the endogenous element of this process to be self-equilibrating, with the central-bank aspect distorting that process. Neoclassicals on the other hand, think that the endogenous aspect is prone to disequilibrium, with central bank action required to correct the problems of coordinating flows.

 

[love detective]

yep and Keen is pretty much to all intents & purposes in the Austrian camp in relation to this (i.e. his assertions that his models prove that the central bank isn't really needed)

Endogenous/circuitism theory & models eschew the need for state/central bank activity in the economy and instead posit that that commercial banks can lend (without the need for any central bank money to exist) purely because of their social role (i.e. people put trust in it because of what it is). However commercial banks don't just appear from heaven, supernaturally endowed with a social role, they only have it because the state/central banks stand squarely & solidly behind it. So the basic premise of endogenous/circuitism implicitly relies upon something that it explicitly rejects (yet very obviously & tangibly exists).

I have knee jerk ideological reaction to the core/thrust of the endogenous/circuitism theory as I see it as providing ideological succour to the idea of a purified neo-liberal view of the world where the state & central bank are not required - i.e. the view that markets, money, capitalism can function naturely, without the state crutch, and are effectively a natural thing.

(the last two paragraphs are just a copy & paste from when this discussion was had last time - funnily enough they both come from a reply to littlebabyjesus....)