Mar 25, 2023
Welcome to episode 142 of Activist #MMT. Today's the final part of my three-part conversation with Scott Fullwiler, on his 2008 paper, Modern Central Bank Operations: The General Principles. Today we discuss principles seven to ten. My full and detailed question and summary list can be found in the show notes to part one. Also, be sure to check out the list of audio chapters at the bottom of today's show notes, to find precisely where each principle, and otherwise, can be found.
(A list of the audio chapters in today's episode can be found at the bottom of this post.)
Principal seven, which refers to a world without a floor system (QE is an example of a floor system), is that a central bank can change its target interest rate by simply announcing it. This is contrary to the false idea that the central bank can only set a new target rate by overwhelming the system with reserves in order to push the rate higher, or push it lower by starving the system by selling a very large amount of bonds. This implies the central bank and its government to be little more than a very large currency user. Also, the "liquidity effect" is the false idea that the mere existence of reserves makes banks want more of them, and that this in turn results in more lending to customers. (This is essentially Say's law, which is the false idea that supply causes demand.)
Principal eight is that the amount of total reserves in the system is primarily due to the central banks method of interest rate management. If a central bank chooses a floor system like QE, then there will be a whole lot of reserves in the system. If they also choose restrictive reserve requirements, then there will be even more as banks demand more in order to meet them. If there was no floor system or reserve requirements at all, then the total amount in the system will be greatly reduced. In this case, once again, the aggregate level will be controlled endogenously – by the rigidness of banks needing to settle payments each day, which is primarily dependent on the behavior of actual humans in the real economy (the non-government sector).
Principles nine and ten basically assert that the central bank is in the unique position of being a currency issuer. Only the central bank, via the execution of fiscal policy, can create net financial assets – which is money we don't have to pay back. Commercial banks can only create credit, which must always be paid back, plus interest. Commercial banks – and indeed the entire financial system and economy – depends on the central bank because: we have to pay taxes which can, ultimately, only be paid with reserves, which can only be done through the banking system.
Also, banks are legal franchises of the state. If a commercial bank tried to bypass the central banking system entirely, it wouldn't be a bank for long. In the same way, you could try and call yourself a bank, but unless you're legally sanctioned and accepted as one by the central bank, you wouldn't get very far.
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And now, let's get right back to my conversation with Scott Fullwiler. Enjoy.
Audio chapters
- 5:42 - It would mean they could buy reserves for low interest (penalty rate) and then earn high interest for holding it (IOR)
- 7:59 - Principle 7: There is no "liquidity effect" associated with central bank changes to its operating target. (Apologies for the very long question! I got it wrong at first, and scrambled to rewrite it at the last minute.)
- 20:40 - Principle 8: The quantity of reserve balances in circulation is primarily determined by the central bank's METHOD of interest-rate maintenance.
- 27:50 - Principle 9: Under current operating procedures, the central bank's balance sheet expands and contracts endogenously while these changes neither create nor destroy net financial assets for the non-government sector. (The banks can't create or delete reserves, only the central bank can.)
- 30:01 - Clarifying this sentence in principle 9: Outside of a floor (QE) system, the monetary base can only be determined endogenously (by commercial banks and potential borrowers).
- 31:10 - Thoughts on his approach to principle ten.
- 32:32 - Principle 10: The central bank's interest rate target "matters" because banks use reserve balances to settle payments. (The central bank is a currency issuer. Commercial banks are currency users.)
- 36:52 - Reservations about the final paragraph in principle ten. (Also, assuming away everything that disagrees with you, and equating sharing sources that refute you with "appealing to authority.")
- 39:52 - If you could, who would you appoint to government positions (Treasury, Federal Reserve, etc)?
- 41:48 - Assuming they're there, what changes would we see? (Your favorite policy plus the job guarantee, or your favorite policy plus the involuntary unemployment)
- 42:46 - Assuming they're there, what changes would we see in monetary policy?
- 47:08 - Macro-prudential regulation instead of one target interest rate.
- 49:31 - Scott will be teaching macroeconomics at Torrens University (for my MMT-plus-ecological economics masters program) starting February. I'll be taking it June 2023. How he's designing the course.
- 53:48 - Goodbyes
- 56:51 - Duplicate of introduction, with no background music (for those with sensitive ears)