Great Leap Forward

Paul McCulley – MMT Won: Declare Victory But Be Magnanimous About It

We’ve just finished up a ten day seminar at the Levy Economics Institute on the work of Hyman Minsky (see here

There were a number of great presentations, including lectures by two financial experts who I consider to be among the best speakers today, Frank Veneroso (of Veneroso Associates) and Paul McCulley (the recently retired brains behind PIMCO). Like many of the presenters at the seminar, both of them addressed the growing crisis in Euroland.

Frank admitted that he had only recently recognized that the Euro system was “designed to fail”. As readers of this blog know, those of us who adopt Modern Money Theory (MMT) have argued since the start that the fatal flaw was the attempted separation of fiscal policy from a sovereign currency. When individual nations like Greece or Italy joined the EMU, they adopted a “foreign” currency—the Euro—but retained responsibility for their nation’s fiscal policy.

For the past decade, many critics have focused on the policy of the ECB—arguing that monetary policy was too tight. Others have argued that the Maastricht Criteria were too tight. While both of these criticisms had some validity, they always missed the main problem: Italy had become the equivalent of a Louisiana but without the benefit of an Uncle Sam. So the problem really was not that nations gave up “monetary” policy (interest rate setting) or that they agreed to overly tight constraints on budget deficits and debts. In reality, as I argued previously on this blog, the Maastricht criteria were too loose. And ECB monetary policy actually was no tighter than Fed policy (on average over the past decade). Nor does monetary policy matter much (see the excellent post by Stephanie Kelton today:

Given the set-up, individual Euronations would inevitably face two problems.

If a deep recession hit, their budgets would automatically move to deep deficits. The problem would not be the Maastricht Criteria (since, after all, almost all Euronations persistently violated those criteria) but rather that markets would raise risk premia on their debt—which would cause interest rates to explode in a manner that would increase deficits further in a vicious cycle. With no “Uncle Sam” to come to their rescue, they’d have to rely on the charity of the ECB to keep their interest rates down. Good luck with that! With the ECB operating under the thumb of the Bundesbank, that was always a fool’s bet.

The second, much greater, problem was that individual nations had become responsible for their own banking systems. But there was no hope that they’d be able to bail them out without sinking their governments. Again, this was by design of the Euro system: there was no Uncle Sam in Brussels to come to the rescue of the governments burdened by debt run-up by private banks that could easily be orders of magnitude greater than total government spending or taxing.

One of the goals of integration was to free up labor and capital flows, removing barriers so that factors of production could cross borders. Indeed, that was a primary reason for adopting the single currency. Whether or not that was a good idea—and whether or not it worked—is another matter. What is important for our discussion today is that it enabled banks to buy assets and issue liabilities all over Euroland. And boy-oh-boy did they do that.

The icing on the cake was the deregulation and desupervision of banking contained in the Basle Accords. That allowed banks to undertake the same sort of crazy schemes that Wall Street’s banks pursued.

That is, of course, what got Irish banks into heaps of trouble as they ramped up lending across Europe, growing their liabilities to multiples of Irish GDP. Then, when their bets went bad, the Irish government had to bail them out, boosting fiscal deficits and government debt to uncharted territory.

Again, this was a design feature of the EMU and the EU more generally: free the banks so that they can blow up, then blow up the government budgets as they try to rescue their banks. (It was not just Euro banks that did it of course; think Iceland and the UK.)

In reality, of course, the Irish bail-out was really designed to save the banks of the center nations—not the periphery. Ireland fell on the sword in perhaps the greatest act of charity ever seen in the history of humanity as it protected German and French and English banks from losses on their lending to Irish banks. Unlike the potato famine, this catastrophe was entirely produced by the Irish government’s policy of taking on the bank debt.

But more important to the current crisis in Euroland was the ability of bank depositors to costlessly shift Euro deposits from one bank to another anywhere in the EMU. This is enabled by the so-called Target 2 facility. Any depositor of—let us say—a Spanish bank can move deposits to a German bank. I won’t go deeply into the details in this particular blog, but such a shift requires that the central bank of Spain obtain reserves that get credited to the central bank of Germany. If deposits tend to flow from the periphery nations, their central banks go ever more deeply in hock to the ECB to obtain reserves that accumulate in the account of the Bundesbank.

Euroland is now in the midst of a massive run on periphery bank deposits. If you think about it, anyone who still has a Euro deposit in any bank other than a German bank is either a philanthropist or a fool. Moving deposits to German banks is a sure bet: if Germany leaves the EMU depositors will get appreciating Marks, and if Germany remains in the EMU depositors have the safest Euro deposits available.

Why take a risk that Italy or Spain or Greece will leave the EMU, default on Euro-denominated deposits, and redenominate them into a depreciating currency?

Frank Veneroso believes that the ongoing run on Spanish banks, alone, could amount to 2 trillion euros flowing to German banks. The run should accelerate in coming days, as periphery depositors decide to be neither fools nor philanthropists.

And if that does happen, Target 2 ensures that the ECB will be stuck with trillions of euros of uncollectible debts due to all the reserves it has been lending to central banks that have to finance the run to German banks. It all essentially comes down to an inadequately designed “reflux” system.

The future lifespan of the EMU can now be measured in days, unless Euroland immediately adopts unlimited deposit insurance for all Euro deposits in all EMU banks.

But Ms. Merkel has declared this would violate the German constitution. Deposit insurance would place an essentially unlimited liability on the ECB, which would be insolvent if Spain or Italy were to leave the EMU. And with no Uncle Sam standing behind the ECB, Germany would get the bill. That’s a bill Germany will not accept. Hence, no deposit insurance and hence no future for the EMU.

Paul McCulley provided essentially the same assessment, although I think he’s been onboard with MMT for quite a while.

As always, Paul provided some nice framing.

As readers of this blog know, MMTers like to begin the analysis by consolidating the central bank and treasury because it simplifies the analysis. We then argue that this consolidated “government” spends by crediting accounts (“keystrokes”) and taxes by debiting them. Deficit spending thus leads to net credits of bank deposits as well as bank reserves. Bond sales offer an interest-earning alternative to zero (or low) earning reserves.

We do this not because we ignore the “internal” operations that go on between the central bank and treasury, nor are we ignorant of various operating constraints put on the treasury. We know, for example, that most modern treasuries cannot sell bonds directly to their central banks; and we know that the treasury must have “money in its account” at its central bank before it can cut a check; and we know that the US Congress in its infinite wisdom has imposed a debt limit on the US Treasury. But the consolidation of the Fed and Treasury balance sheets is a simplification that gives us a place to start the analysis. Then we add the bells and whistles.

Paul gets that. He pointed out that no one objects to consolidating the balance sheets of husband and wife. The “family balance sheet” is consolidated in the same way that we consolidate the “government balance sheet”. Sure, the wife owes the husband and the husband owes the wife. And before the wife can spend on those Gucci shoes, she’s probably got to jump through some pre-approved hoops. Paul called these hoops “pre-nuptials”. The central bank and treasury have entered into a variety of pre-nuptials, some of which are probably a good idea.

But by mutual agreement, they can be changed. And both the US Treasury as well as the US Fed are “creatures of Congress”, subject to the laws drafted by elected representatives and signed by the president. If the pre-nuptials get in the way of good public policy, they can be eliminated.

Paul closed his talk with an appeal. He noted that MMT gets all this right. It foresaw the Global Financial Collapse. It predicted the current crisis of Euroland, providing the correct prognosis of the fatal flaws of divorcing fiscal policy from currency sovereignty. And it predicted that the first serious financial crisis would create an insurmountable EMU crisis. Only a thorough reformation to unify fiscal policy and currency sovereignty will save the project of integration.

So, Paul asked, why not simply declare victory? Be magnanimous toward all those who got it wrong. No need to rub their faces in their mistakes and the mess they’ve made. Welcome them aboard.

We’re all MMTers now!

For more details on the MMT approach, order my new book, which should be out in August:

Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, by L. Randall Wray , Palgrave Macmillan, August 2012; Order your copy at

As you all know, the GLF has been on hiatus. It’s back. I’ll continue this thread next week. Thanks for your patience.

51 Responses to “Paul McCulley – MMT Won: Declare Victory But Be Magnanimous About It”

PhilJune 26th, 2012 at 1:33 am

How modest of you to steal Wynne Godley's Euro prediction, repackage it as your own and then sell books claiming you understand how it all works!!!! Ha.

FDO15June 26th, 2012 at 3:22 am

You are almost unbearable to read Wray. I enjoy the arrogance in your writing style even though you stole the Euro prediction from Wynne Godley. The fact that you don't cite him in the article doesn't surprise me either. After all, if people knew it wasn't your prediction you book might not sell as well and then how could you cash in on the brilliance of other by pawning it off as your own?

Wanda ReneeJune 26th, 2012 at 3:58 am

Why are the "HATERS" opinions out of wack? What is going on? The blog comments are full of negative crazy elephants vs donkeys garbage. Truly Economonitor needs a moderator to approve the comments. WHO IS MINING THE STORE?

Neil WilsonJune 26th, 2012 at 6:06 am

Got to admit its a good rebranding though. Given that its a Swedish Central Bank award rather than anything to do with Alfred Nobel.

Sensibly he chose to support Peace rather than Economics.

Neil WilsonJune 26th, 2012 at 6:15 am

" Again, this was by design of the Euro system: there was no Uncle Sam in Brussels to come to the rescue of the governments burdened by debt run-up by private banks that could easily be orders of magnitude greater than total government spending or taxing."

Isn't the design flaw the lack of 'limited liability' for governments and banks? There is no 'chapter 11' style bankruptcy process for either of them that defines precisely which creditors get to take it on the chin.

If the debt was allocated to the government rather than the country then when the government 'goes bust' by being voted out the debt would be written off as it is when a company 'goes bust'.

That would of course put the cost of borrowing up and highlight that the auto-stabilisers cannot function effectively in that environment.

StefanoJune 26th, 2012 at 9:30 am

I am not a philanthropist, and certainly hope that does not force me to consider myself a fool.
My life savings still reside in several Italian banks, partly due to a sliver of optimism but mainly because I fear that if / when the sh_t really hits the fan, and a large share of Greeks, Italians and Spaniards have already transferred their savings to German banks, that Germany will pass a law expropriating funds received from the periphery in order to help pay for the unfathomable costs of the end of the Euro.
Now wouldn't that be even more foolish that keeping everything in Italy ? I'd truly appreciate a comment from Randall on this question.

LRWrayJune 26th, 2012 at 11:18 am

Philidiot: It is quite one thing to say that Wynne wrote about the Euro in 1992 and quite another to claim MMTers repackaged his work. And, indeed, the piece you cite makes no mention of the potential for financial crash due to the design of the system. (It is, however, a great piece, brilliantly written by the best writer I ever knew.)The biggest influence on MMTers thinking about the euro came from Charles Goodhart's 1998 paper and from Warren Mosler who was the first–so far as I know–to make the argument that the crisis of the EMU would come from a banking crisis. In truth, Wynne was part of a discussion group at Levy going over draft chapters of my 1998 book back in 1996/97; it was at that time that he was exposed to MMT and our integration of endogenous money and sovereign currency.

LRWrayJune 26th, 2012 at 11:19 am

A few years later, Stephanie Bell and Ed Nell organized an MMT conference on the Euro (later published as a book) with the key players including Goodhart and Mosler. Wynne's own models had a rudimentary approach to money and finance, partially remedied by bringing Marc Lavoie on board with the final textbook. When he left Levy, his research was supported for a time by funding from Warren Mosler. Wynne tried to write a book that would begin in the very first chapter with our "taxes drive money" approach and indeed in my last phone call from him he was encouraging me to join up with him to write the book. But he was in ill health and I had too many other projects.

LRWrayJune 26th, 2012 at 11:20 am

Finally, Philidiot, quite simply, you do not know what you are talking about with respect to the development of the MMT approach. Wynne was a great friend and a brilliant economist, he had a tremendous influence on us through his work on sectoral balances, and we likewise influenced his thinking on money, banking, and finance. I am happy to give him all the credit he is due, but we did not steal his ideas on the euro.
The "University of Nowhere" was in Denver, although in 1992 I was at Levy on leave–where Wynne would soon reside.

LRWrayJune 26th, 2012 at 11:31 am

Stefano: it is a good point and I'd put a nonzero probability on the scenario you paint. But I still think the safest thing to do would be to shift deposits to a German bank. Note, I do not recommend this with pleasure–I hate to see the destruction of Italy and of Italy's banks in favor of Germany and her banks. Swiss banks would be for you an alternative but then you are going across exchange rates.

Obviously, the best solution is euro-wide deposit insurance and creation of a central fiscal authority–but that still looks unlikely.

anonJune 26th, 2012 at 3:57 pm

It's not surprising that none of you teach at top 25 schools. The tone you use with readers is immature and childish. You're a deterrent to your own goals and I don't even think you know it.

toodolooJune 26th, 2012 at 4:11 pm

It appears from a cursory look here he's aggressive with trolls, and respectful to those worth being respectful to. That's standard in blogville. Get over it.

And "top 25"? How many of them saw the GFC coming? How many of them understand money? Unfortunately who gets into which department of which "rank" is not a meritocracy, but instead driven by who went to which Ph.D. program. Go look for yourself and think about it a bit.

anonJune 26th, 2012 at 5:23 pm

Let's be real here. MMT and Wray see any environment with more than 0% unemployment as unacceptable. Wray has been referring to the economy as a "contained depression" since the early 90's. So claiming that they "predicted" the crisis is like saying that a stopped clock predicts the time.

MMT hates capitalism and banks. So they've spent 20 years predicting bad things from banks. And what do you know – a banking crisis finally happened and MMT is having their day in the sun. But don't confuse this for making great predictions.

Plenty of other people predicted the crisis but you don't see prestigious and respectable professors like Robert Shiller running around saying he will be "magnanimous" about it all, do you?

MarcoPoloJune 26th, 2012 at 5:43 pm

“place an essentially unlimited liability on the ECB, which would be insolvent if Spain or Italy were to leave the EMU.”

I thought the point was that a sovereign currency issuer could not become insolvent.

RyanVMarkovJune 26th, 2012 at 6:42 pm

"It's not surprising that none of you teach at top 25 schools."

#1 US university for economics is the University of Missouri-Kansas City, anon. If my kids want to study economics one day, that's where they will be going.

RyanVMarkovJune 26th, 2012 at 6:54 pm

MMT doesn't hate capitalism. It only puts the debate in the right perspective. Capitalism, socialism or communism is political problem, which democracy will solve.

RyanVMarkovJune 26th, 2012 at 6:59 pm

"You MMT guys deserve the Nobel Prize, in my opinion… "

That's true, but does the Nobel Prize for Economics deserve them? This is the question.
Well, considering the publicity gains, I would approve it. 🙂

TomJune 26th, 2012 at 7:03 pm

I agree that central banks should be considered part of the public sector, not part of the private financial sector as they currently generally are. I agree that currency is a kind of public debt.

I also see the usefulness of producing consolidated public or federal public accounts that include the central bank and net out its transactions with the treasury.

But I disagree with MMT's implication that the central bank and treasury always inherently coordinate their actions. For example the MMT claim that no currency issuing state can become insolvent implies that there is a hard and fast guarantee that the central bank will issue as much currency as the government requires to pay its debts. There is no such guarantee. Central bank independence is never absolute, of course, but it is very real, at least in most developed countries. Mainly though I think the alleged immunity to insolvency of currency issuers is a red herring; it doesn't change the risk of real-term losses.

Your analysis of the euro is in fact overly simplistic to the point of being wrong. Montenegro and Kosovo are using a foreign currency over which they have no control. The eurozone states are using a common currency over which they have considerable control. Firstly they can use their influence at the ECB level, as for example the periphery states recently did to bring about LTRO. Secondly they can create euros independently through so-called emergency liquidity assistance, so long as they respect certain restrictions laid out in treaties (eg no direct financing of their governments – something that was generally banned in western Europe long before the euro). Joining the euro certainly helped facilitate large credit bubbles in the periphery, and pegging to the euro did the same in the Baltics.

But I think it's a myth that abandoning the euro post-bubble would make anyone's life easier. If for example Spain gave up its right to joint control of and responsibility for the euro in exchange for total control of and responsibility for its own currency, public and private interest rates would more than double overnight.

LRWrayJune 26th, 2012 at 9:34 pm

Uhm, Tom. Who said abandoning euro would make life easier? It is at best second best. And if you are correct that all is hunky dory within the EMU, why is there a crisis? Simplistic to the point of being wrong? I presume you are nowhere within the EMU. The individual nations–with the exception of Germany–are deep in the poo, so to speak. They do not and cannot control their own fates (so long as they stay in the euro). The ECB is controlled by Germany. It is no secret. Ms. Merkel makes that absolutely clear.

To be clear: my first choice is European integration. But that requires fundamental reformulation. The current set-up was designed to fail, and it will fail without reform. Politicians in the center–mostly Germany–have a week or two to realize this.

LRWrayJune 26th, 2012 at 9:38 pm

Like any central bank, the ECB needs a fiscal authority behind it. Right now that is Germany, and Germany will not accept the bill. I made that clear, and so did Ms Merkel. The ECB has gone farther than anyone expected (as did the Fed). It will reach the point where it says "no more". Bernanke reached that point, as Henry Paulson discovered. And he had a backstop. The ECB does not. The entire set-up of the EMU was to PREVENT the ECB from acting like a currency issuer. It COULD ignore all restrictions, but it WILL NOT because Germany will pull the plug.

LRWrayJune 26th, 2012 at 9:41 pm

Wanda: the "haters" are on the payroll of an anti-MMT demagogue. So far as I know, Economonitor only moderates obvious spam–not ideologically driven drivel.

Just have fun with them. They are "thick as a brick" as Jethro put it.

JoseJune 27th, 2012 at 3:46 am

I think the choices on further European integration – or on stepping back – should be freely made by the electorates of the European countries.

What put us in this mess was precisely the attitudes of the European elites of deciding on monetary integration on the back of their peoples. German public opinion was massively against the euro but it was ignored. The French only approved Maastrich because of a last minute before the referendum joint appeal by Mitterand and Kohl that scared the s*** out of voters by implying that a No vote would mean a possible return to war (!) between France and Germany, etc etc.

The last couple of years have proved that eurocratic moves that lack public support and enthusiasm are bound to fail. Pushing for Fiscal Union on the back of peoples is a recipe for an even worse disaster in the medium term.

I do hope that the sound American academics who created MMT won't forget the lessons of recent History: namely, that theoretical blueprints that look great on paper can go horribly wrong once applied to the messy reality of European societies.

PayamJune 27th, 2012 at 1:19 pm

Jose I understand your concerns but you don't really have an argument here, we're perfectly willing to listen to criticisms (healthy or not) but if you don't provide any analysis other than to say that we shouldn't suffer from hubris (which is valid) it still won't stop us from offering up our solutions.

LRWrayJune 27th, 2012 at 2:36 pm

Jose: I agree there should have been a vote by voters, nation-by-nation, whether they wanted to give up sovereignty. If things had been explained clearly, I expect you are right that there is no way the EMU would have been created. But all that is rather beside the point now. The EMU has probably 2 weeks to stop the crisis. Stopping the financial crisis does not require giving up more sovereignty. No more austerity ought to be imposed–but if it is to be imposed it must be imposed after democratic votes. There's no hurry for that in any case. Even if Austerians are right that budget deficits can be reduced by austerity (I think they are dead wrong), that takes a long time to work. The immediate problem is a financial crisis, interest rates that are too high, market funding, run on deposits, illiquidity, and insolvency. None of those problems can be resolved by austerity even on conventional thinking.

TomJune 27th, 2012 at 11:02 pm

Abandoning the euro would be far from second-best. It would be a disaster for any of the periphery countries.

Obviously not all is hunky dory within the EMU. There is a crisis resulting from a burst credit bubble. There aren't enough real resources to satisfy financial claims. There is no fancy-pants macroeconomics wizardry that will solve that problem. Economies must be rebuilt on a sounder basis from the ground up, through hard work and innovation. In my opinion the fastest way forward is to write off losses ASAP. But Europeans don't like such ideas. They're going to deleverage very, very slowly, much like Japan, but with more central bank issuance and less government bond issuance.

Germany has two votes out of 23 on the ECB board, which votes by majority on most issues, two-thirds to take extraordinary measures. Doves dominate, Germans tend to resign in frustration. You're apparently thinking of the process of creating and authorizing the ESM, which requires a consensus and thus Germany can control. You really do need to study how the Eurozone works. You're absolutely wrong that the euro in Spain or Greece is the same as a foreign currency. Relative to national GDP, the Spanish and Greek central banks have issued more euros since 2008 than the Fed has issued dollars. Though of course those euros don't stay in Greece or Spain.

TomJune 28th, 2012 at 5:41 am

Austerity could "work" in the sense of getting through the crisis ASAP if it were combined with large-scale write-offs and US-style short sales and jingle mail. GDP would drop sharply but would bounce back. Merkel's misguided program of austerity without write-offs is trying to squeeze blood from a turnip. It's a recipe for Japan-style decades of very slow deleveraging and stagnation.

DimitrisJune 28th, 2012 at 8:24 am

Being Greek (and right in the middle of a depression that clearly is worse than the descriptions I've read about the 30s) I can only comment that the second best option, leaving euro (if that could be somehow "best"), is the only possible option. You see, although I completely agree with your assesment of the crisis, I think that the solution you propose is more of a utopia than a realistic option, politically. The Germans will NOT let go of their perceived gains from the common currency; so far they are relatively stable, their banks are full of cash and the unemployment is low, if 6 pc is "low". I believe they will finally pay this very dearly indeed. But this, staying with the "winning" strategy even if in the long run it is wrong, has happened all too often in the past, hasnt it.
Economics cannot pretend that it is a science, since it is actually, well, politics. MMT hasnt reached that kind of political consensus yet (it may in the not-soon-enough-to-save-the-day future) that would allow it to propose not only rational and reasonable but also "doable" strategies.
In the mean time, I really wish there were an easy way out of this bloody mess.

T-revJune 29th, 2012 at 5:30 am

Why is it that EVERY economic blog I go to is "flogging" a book 🙂

Professor Steve Keen seems to exposes MMT for the fraud it is and yes, he is flogging a book as well but at least he is calling it as saying the problem is with his kith 'd kin, Economists.

PZJune 29th, 2012 at 11:43 am

Why does it need fiscal authority? Do you think that with sufficient losses it would became bankrupt and cease operating? Do bankrupty laws that govern private enterprizes also cover ECB?

PZJune 29th, 2012 at 12:01 pm

Ones debt is other entity's asset. Anyone who understands rudimentary basics of double-entry accounting knows that debt-writeoffs are dead end policy when it comes to economic recovery, simply because making people poorer does not make them spend more. It is ordinary people's deposits at the banks we are talking about that would be in the firing line in a case of a large scale debt write-off, unless, of course, someone would make these creditors whole again by actions of it own. Say, an issur of currency. The ECB.

PZJune 29th, 2012 at 12:47 pm

I think that the Euro-nations should move simultaneously to two different directions: strenghten the euro by fiscal union, a central authority cabable of issuing it's own liabilities in true sovereign fashion. to the tune of 10 – 20% of euro-area GDP. It could then transfer money to the national governments and end these unneccessary fiscal crises.

The other direction would be that national governments could issue their own liabilities while still reamaining in the eurozone i.e. a dual currency system. All it would have to do to get this currency accepted is to require it in tax payments toward itself. Then anyone who has tax liabilities to the state would find this new currency useful. They would offer to trade them in the currency markets for euros if the price were right, or if some tax payments in local currency were mandatory. That someone would offer to purchase local currency for euros at the FX markets would ensure that the new currency always have some value, it could not be worthless.

In this digital age easy to use FX systems could be integrated into every bank account to allow easy convertability between euro and local currency, and bank accounts could be mandated to incorporate to numeric values each, one for euro deposits and other for local currency. Exchange rate regime should be "managed float" where national government would intervene to prevent most extreme fluctuations in the exchange rate, but it would not promise to convert local currency to foreign currency at any specific exchange rate because in practise these promises are really hard to keep and would decimate governments "fiscal freedom" to spend it's own currency into existence.

The dual currency system could then be gradually over time replaced with functioning euro-system, or euro could be marginalized as the new local currency could be developed to dominate if so desired. Options whether to go to the national currencies or keep the euro would be open.

One last thing to mention is that when issuance and circulation of local currency would restore economic health of euro-nations even the euro-debt burdens would became easier to service because there is so much more to tax in an economy that is firing at all cylinders.

BootsaJune 29th, 2012 at 7:56 pm

T-rev — in case you missed it, Keen recently worked with Neil Wilson (see above) to see if his model aligns with the MMTers sectoral balances approach, and it turns out it does. He is effectively an MMTer now. The only debate I can detect now between him, and say Bill Mitchell, is over the need for a debt jubilee (not a minor issue, I grant you, and a solution I like). But, suggesting that he "exposes" MMT as a supposed "fraud" is, I think, belied by the facts. Perhaps the MMTers can correct me if I have misunderstood the situation.

TrollkillerJuly 2nd, 2012 at 7:18 pm

Just so you know, "Phil", "anon" and FDO15 are all the same person. The offensive idiotic troll FDO15 has started using multiple identities to try and further his idiotic campaign against MMTers. Whilst also acting as an ass-licking sycophant on the MMR site and trying to get them to hate you guys as much as him. He is either deranged or, as you say, on someone's payroll.

BobJuly 24th, 2012 at 1:20 pm

"There is room for the Fed to create a BUBBLE IN HOUSING PRICES, if necessary, to sustain American hedonism. And I think the Fed has the will to do so,
even though political correctness would demand that Mr. Greenspan would deny any such thing."
Paul McCulley
Retired IDIOT

Thomas Palley Tom PalleyJuly 24th, 2012 at 10:02 pm

Permit me to offer the following:

“5.3 Will capital still be able to veto policy?

…First, financial capital may still be able to discipline governments through the bond market. Thus, if financial capital dislikes the stance of national fiscal policy, there could be a sell-off of government bonds and a shift into bonds of other countries. This would drive up the cost of government borrowing, thereby putting a break on fiscal policy (Palley, 1997, p.155-156).”

Palley, T.I., "European Monetary Union: An Old Keynesian Guide to the Issues," Banco Nazionale del Lavoro Quarterly Review, vol. L, no. 201 (June 1997), 147 64.

Thomas Palley Tom PalleyJuly 24th, 2012 at 10:15 pm

MMT is a mix of old and new. The old is widely understood: the new is largely wrong.

My posting above quoting from my 1997 paper shows two things:

(1) MMT'ers were not the first to predict the structural flaw in the euro regarding possibilities for conduct of fiscal policy.

(2) Old Keynesians fully understood that if you remove the national central bank, national government is reduced to the status of a province and may be unable to run deficit based fiscal policy if bond markets refuse to finance it.

JimJuly 25th, 2012 at 8:25 pm

@ Tom Palley,

I find it highly disappointing that the senior economist for the AFL-CIO would be so closed to the freedom offered by fiat currency. Your comment about bond selloffs as a possible discipline seems to miss almost everything about MMT. Why would there necessarily need to be bonds in the first place?

Regarding Old Keynesians, how about Abba Lerner?

kemal erdoganJuly 26th, 2012 at 4:45 pm

Dear Mr. Wray,

I (somewhat) understand your fury but your tone is not acceptable in a public space where civil discussion is supposed to take place (except for digital photography review sites, which I visit frequently, there apparently everyone calls each other idiots).

The same is definitely true for Phil, but his opening comment was calling for such a response. I just wish you did not do it.

Besides, I believe, that insight was not really that new or controversial. Euro is a fixed exchange rate mechanism akin to gold standard and there has been many people writing about why it tends to break in the case of deep recession

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