Wednesday, October 16, 2013

Fama: the idiot Nobel prize winner.

Here’s some ignorance of truly staggering proportions from Fama, the recent Nobel prize winner. (H/t Warren Mosler).
He says, “Government bailouts and stimulus plans seem attractive when there are idle resources – unemployment. Unfortunately, bailouts and stimulus plans are not a cure. The problem is simple: bailouts and stimulus plans are funded by issuing more government debt…. The added debt absorbs savings that would otherwise go to private investment….”
Complete nonsense: as Keynes pointed out, and as little more than common sense, a government deficit can be funded by, or accumulate as EITHER more debt, or more money (monetary base to be exact).
As Robert Mugabe has worked out (though this seems to beyond the comprehension of many so called professional economists) the government / central bank machine can print and spend as much money as it wants: i.e. there is no physical law known to mankind that stops a government cranking up the printing press. (Amazing that I need to spell this out isn't it?)

Independent central banks.
But as it happens under the institutional arrangements that exist in most countries (but not Zimbabwe) there is a clear separation between treasuries and central banks: the separation is there SPECIFICALLY to bar politicians from direct access to the printing press (amongst other reasons).
Thus if a treasury thinks there is room for stimulus, it will borrow and spend more (and/or collect less tax). And that, as Fama rightly suggests, will raise interest rates and crowd out private investment. But . . . . assuming a treasury is RIGHT in thinking there is room for stimulus, then the central bank will think likewise. Thus the central bank won’t let interest rates rise: it will print money and buy government  debt in sufficeint amounts to PREVENT an interest rate rise. Indeed: it will quite likely go even further: print and buy enough government debt to ensure that interest rates ACTAULLY FALL.
The net effect is that the “government / central bank machine” deals with the recession by printing and spending money (and/or cutting taxes). So in short, Fama’s claim that there is some sort of deflationary effect imposed on the private sector when government goes for stimulus is COMPLETE HOGWASH.

Moreover, even if a central bank DIDN’T print money and buy government debt, the net effect of the treasury borrowing and net spending would be stimulatory TO THE EXTENT THAT government debt and monetary base are similar in nature or merge into each other. That is, there is little difference between SHORT TERM government debt and monetary base. To illustrate, what’s the difference between $10k worth of $100 bills and a promise by the US government to pay you $10k in two week’s time? Not much difference is there?
And remember that when a treasury borrow and net spends, there is a NET INCREASE in what MMTers call "private sector net financial assets". That is, the net effect of a treasury borrowing and spending $X is that the private sector is $X better off. Think about it: treasury borrows $X, spends that back into the private sector, so the private sector is back where it started, PLUS the treasury gives bonds worth $X to those it has borrowed from. Hey presto: the private sector is $X up!!!
And finally….
If you (or any economics Nobel laureates) want the above spelled out using monosyllabic words and shorter sentences, you only have to ask in the comments below, and I’ll be happy to oblige.


P.S. (later same day): The above Fama nonsense is also demolished here.

And here.  And a few days later, Brad DeLong has a go at Fama. And there's yet more.

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