Macroeconomics of Loanable Funds & Endogenous Money compared using Minsky

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The main­stream eco­nom­ic idea that banks are just inter­me­di­aries between savers and investors is a fan­ta­sy, but giv­en that fan­ta­sy, their argu­ment that the lev­el and rate of change of pri­vate debt are not macro­eco­nom­i­cal­ly sig­nif­i­cant (except at the “Zero Low­er Bound”) is cor­rect. But in the real world, the role of the lev­el and rate of change of pri­vate debt is cru­cial. I illus­trate this by build­ing a Min­sky mod­el of Loan­able Funds and con­vert­ing it to the real world of Endoge­nous Mon­ey. Then I explain how cred­it growth plays an essen­tial role in aggre­gate demand and income, and how this is con­sis­tent with the tru­ism that Expen­di­ture equals Income.

Laughter–the Worst Medicine

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Like many com­men­ta­tors, I regard August 9 2007 as the start of the “Glob­al Finan­cial Cri­sis”. On that day, BNP Paribas declared that sev­er­al of its funds were being closed because liq­uid­i­ty in those mar­kets had com­plete­ly evap­o­rat­ed:


So I was par­tic­u­lar­ly amused–in a sick sort of way–to see this bril­liant info-graph­ic on The Fed on Twit­ter today: it plots the amount of laugh­ter in FOMC meet­ings between 2000 and 2012. “Peak Laugh­ter” occurred lit­er­al­ly days before the cri­sis began:


Kingston Uni releases monetarily sound forecast model of US Economy

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PERG econ­o­mists are devel­op­ing a macro­econo­met­ric mod­el to track the evo­lu­tion of the US econ­o­my over the medi­um term, which is 3–5 years:

The mod­el belongs to the fam­i­ly of “finan­cial bal­ances mod­els”, an approach pio­neered by Wynne God­ley and col­lab­o­ra­tors at Cam­bridge Uni­ver­si­ty (UK) and then suc­cess­ful­ly devel­oped by the macro­eco­nom­ics team of the Levy Insti­tute — led by God­ley him­self.


At its heart, the KFBM (Kingston Finan­cial Bal­ances Mod­el) is char­ac­terised by a set of thor­ough account­ing matri­ces that gath­er the major stocks and flows of the US econ­o­my as well as their links across insti­tu­tion­al sec­tors. This results in three key strengths of the KFBM:

Tilting At Windmills: The Faustian Folly Of Quantitative Easing

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As I explained in my last post, banks can’t “lend out reserves” under any cir­cum­stances, which under­mines a major ratio­nale that Cen­tral Bank econ­o­mists gave for under­tak­ing Quan­ti­ta­tive Eas­ing in the first place. Con­se­quent­ly, the hope that Bernanke expressed in 2009 is “To Dream The Impos­si­ble Dream”:

To dream the impos­si­ble dream
To fight the unbeat­able foe
To bear with unbear­able sor­row
To run where the brave dare not go

For­mer Chair of the Fed­er­al Reserve Ben Bernanke lis­tens while US Sec­re­tary of the Trea­sury Jacob Lew speaks at the Brook­ings Insti­tu­tion July 8, 2015 in Wash­ing­ton, DC. AFP PHOTO/BRENDAN SMIALOWSKI (Pho­to cred­it should read BRENDAN SMIALOWSKI/AFP/Getty Images)

Hey Joe, Banks Can’t Lend Out Reserves

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I began anoth­er post crit­i­cal of Joe Stiglitz’s analy­sis with the caveat that I like Joe. I’ll add to that that I respect his intel­lect too, both because he’s very bright—you don’t win a Nobel Prize (even in Eco­nom­ics!) with­out being very bright—and because com­pared to some oth­er win­ners, he is very capa­ble of think­ing beyond the lim­i­ta­tions of the main­stream.

But there are some main­stream con­cepts that are so deeply embed­ded in even high­ly intel­li­gent, flex­i­ble thinkers like Joe, that they con­tin­ue think­ing in terms of them, when a bit of real­ly seri­ous thought would show that the con­cepts are in fact non­sense.

For Kingston “Becoming An Economist” students

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I’m post­ing videos of lec­tures giv­en by my Kingston col­leagues to the intro­duc­to­ry “Becom­ing an Econ­o­mist” course, since the Study­S­pace soft­ware Kingston uses does­n’t sup­port MP4 files. The first is Devrim Yil­maz’s lec­ture last week on “Data Col­lec­tion and Pre­sen­ta­tion”.

My Kingston Inaugural Lecture with slides and data

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I’ve been Head of School at Kingston Uni­ver­si­ty Lon­don for over 18 months now, but these things do take time: last Wednes­day I gave my inau­gur­al Pro­fes­so­r­i­al lec­ture to an audi­ence of about 200 peo­ple. My screen-record­ing video of the talk is below. Click here to down­load the Pow­er­point slides; Min­sky cri­sis mod­el; Min­sky Loan­able Funds mod­el; Min­sky Endoge­nous Mon­ey mod­el; Pri­vate Debt lev­els (6 coun­tries); Pri­vate Cred­it growth (6 coun­tries); USA Pri­vate Debt change & Unem­ploy­ment; Pri­vate Debt Accel­er­a­tion & Asset Prices.

Note To Joe Stiglitz: Banks Originate, Not Intermediate, And That’s Why Aggregate Demand Is Stuffed

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I like Joe Stiglitz, both pro­fes­sion­al­ly and per­son­al­ly. His Glob­al­iza­tion and its Dis­con­tents was vir­tu­al­ly the only work by a Nobel Lau­re­ate econ­o­mist that I cit­ed favourably in my Debunk­ing Eco­nom­ics, because he had the courage to chal­lenge the pro­fes­sion­al ortho­doxy on the “Wash­ing­ton Con­sen­sus”. Far more than most in the eco­nom­ics main­stream—like Ken Rogoff for exam­ple—Joe is capa­ble of think­ing out­side its box.

But Joe’s lat­est pub­lic con­tri­bu­tion—“The Great Malaise Con­tin­ues” on Project Syn­di­cate—sim­ply echoes the main­stream on a cru­cial point that explains why the US econ­o­my is at stall speed, which the main­stream sim­ply doesn’t get.

The Power And The Impotence Of The ECB

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I’ve attend­ed two con­fer­ences in two days where both the pow­er and the impo­tence of the Euro­pean Cen­tral Bank (EBC) have been on vivid dis­play.

Its polit­i­cal pow­er is con­sid­er­able, both in form and in sub­stance. At both sem­i­nars, the ECB speak­er—ECB Board mem­ber Peter Praet at the first, and ECB Pres­i­dent Mario Draghi at the second—spoke first, and then left. In form, the ECB has no need to defend its poli­cies because it is unim­peach­able in its exe­cu­tion of them. In sub­stance, it does not even con­sid­er­ing engag­ing with its subjects—I use the word deliberately—in open and robust dis­cus­sion.