Thursday, August 26, 2010

The monetary mentality strikes again!

They say I'm caricaturing the view of monetary economists to imply that they just want to get people to spend, spend, spend, whether or not that spending is actually accomplishing anything of value, that this nominal GDP has become an end in itself, completely decoupled from whether it actually accomplishes any good by what we really look for in "the economy".

But then along comes famous economist Alan S. Blinder to prove my caricature right ... again:

So the third easing option is to cut the interest rate on reserves in order to induce bankers to disgorge some of them. ... How about minus 25 basis points? ...

Charging 25 basis points for storage should get banks sending money elsewhere. The question is where. ...

... suppose some fraction of the $1 trillion in excess reserves was to find its way into lending. Even if it's only 10%, that would boost bank lending by 3%-4%. Better than nothing.

There, again, you see the mentality: get the money spent. Out there. Somewhere. Anywhere. Doesn't matter if it's destructive, shortsighted loans. Doesn't matter if it just jumpstarts projects that have to unwind and liquidate in a year. Just spend money and we'll all be fine!!!

UPDATE: After posting this, monetary stimulus ringleader Scott Sumner actually endorsed the passage. Yep, get that money lent lent lent! We'll worry if the loans actually went to genuine economic productivity ... um, later.


Taylor Conant said...

Hi Silas,

I had a college prof who was teaching his "Money and Banking" class about fractional reserve. I pointed out (through repeated hand-raising and questions) that FRB seemed to be a really unstable form of banking and could create severe economic costs if the system because wobbly. His response? In anger, he asked:

"Well how else are banks supposed to make money?"

This was a guy who had done his fair share of "consulting" with the Fed over the years, like Blinder. From libertarian theory we "know" that the regulators typically tend to serve the regulated and anecdotes like mine coupled with writings by people like Blinder make you wonder,

"Are these people just trying to justify never-ending profits for their buddies, or do they actually think they're doing economics?"

Taylor Conant said...

By the way, here is a link to my latest post on another "former Fed", MoStan's Stephen Roach.

So Close, and Yet, So Far
Kind of makes you feel like there's some saying out there that isn't being said (publicly)-- "once a Fed, always a Fed."

Silas Barta said...

Wow, thanks for sharing that, Taylor. I always had suspicions, but I never thought it was that bad!

Much of the economics profession really has let itself become apologists for the political class.

Would they really be able to find jobs if they weren't propped up by government largesse?

jsalvati said...

I am kinda surprised by this post. I thought I had at least convinced you that wanting to stabilize spending was at least worthy of non-ridicule. Have I not at least established that such a desire is not *obviously* wrong?

Silas Barta said...

@jsalvati: I wasn't criticizing the general desire to stabilize spending. I was criticizing the casual assumption that, "More bank loans are necessarily good."

Do you really think that squeezing banks until they have to loan is a good idea, simply because it will produce loans?

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