Monetary Realism

Understanding The Modern Monetary System…

Not wanting Bad Investments does not equal Socialism

Matt Yglesias is having a problem with a column by Larry Summers:

“He’s saying that in a low interest rate environment we dare not leave investment decisions up to the private sector, which is going to just blow the money on boondoggles and white elephants—the state needs to step in and plan the economy. Socialism, in other words. But does Summers really think that? It sure doesn’t sound like something he thinks.”

Here is the problem paragraph by Summers:

“However, one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to undertake with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative real interest rate. There is also the question of whether extremely low safe real interest rates promote bubbles of various kinds.”

I don’t see much of a problem here. This is an entirely reasonable statement.

It’s worth stating clearly: negative interest rates involve paying the borrower to borrow money. In a negative interest rate environment, the lender is paying money to the borrower so they will borrow money.

Usually, people and companies have to pay to borrow money. You go to the bank, get a loan, and pay the entire amount of the loan back, with extra money in addition to the money you borrowed.

This extra money is a way to compensate the lender for the risk of possible default, non-payment, or delayed payments. Negative interest rates turn this relationship on its head, so that the borrower is being paid for the trouble of actually borrowing money.

You can think of negative interest rates as borrowing money, and then paying back less than you borrowed, keeping some of the money you borrowed as your own.

What types of investments have such poor future returns someone would have to pay you to make the investment? Well, risky investments with poor certainty of returns. Or possibly, investments which don’t entirely cover lending costs.

The first – poor certainty of returns – seems like a bad investment anyway, and probably not ones we should choose for our economy.

The second reason – investments which do not cover lending costs – is the definition of ponzi finance for Minsky. Ponzi finance is where the investment does not generate enough cash flows to cover lending costs, so the investment asset must go up in value to create a profitable investment opportunity. It’s the final stage before a credit bubble breaks and causes disaster.

If you are talking about the Financial Instability Hypothesis as a possible reason of what happened to cause the crisis, then you don’t want to spur anyone to make investments which are almost certainly going to cause another credit crisis.

It’s entirely reasonable for anyone – even a jackass like Larry Summers – to question what types of investments are so terrible someone needs to shove cash money into your hands so you will do the investment. It’s also reasonable to think forcing companies to take loans could lead to another bubble.

There is a case to be made that we should be giving private businesses and people money to promote investment. I’ve made this argument before. And, paying people to take out loans is a way to give people money, so let’s force them to take out loans, right?

However, if we have a choice between giving people money in the form of loans, or simply giving people cash money, I strongly prefer cash money. We do have this choice, so we should probably prefer just giving people money over incenting them to take out loans.

Making people take out loans exposes them to another problem. James Monitor hints at the problem in his latest: 

However, today we see something very different. As Exhibit 2 shows, today’s opportunity set is characterized by almost everything being expensive. As I noted in “The 13th Labour of Hercules,”2 this is a direct effect of the quantitative easing policies being pursued by the Federal Reserve and their ilk around the world.

“The Fed has been unusually transparent in explaining its thoughts on the impact of quantitative easing. Brian Sack of the New York Fed wrote in December of 2009 (bold emphasis added):

A primary channel through which this effect takes place is by narrowing the risk premiums on the assets being purchased. By purchasing a particular asset, the Fed reduces the amount of the security that the private sector holds, displacing some investors and reducing the holdings of others. In order for investors to be willing to make those adjustments, the expected return on the security has to fall. Put differently, the purchases bid up the price of the asset and hence lower its yield. These effects would be expected to spill over into other assets that are similar in nature, to the extent that investors are willing to substitute between the assets. These patterns describe what researchers often refer to as the portfolio balance channel.

Market participants have (at least until the last month) reacted to this situation by “reaching for yield” as witnessed by the more detailed fixed income forecasts in Exhibit 3. This could be described as a “near rational” bubble (inasmuch as investors are reacting to the very low cash returns, which they expect to last for a long time). I’ve described it as a “foie gras” bubble as investors are being force-fed higher risk assets at low prices.

A “foie gras” bubble! That’s a good one. I wish I had thought of it.

Still, he gets close to a problem of high asset prices. His concern in the paper is about investing – it’s hard to make money in a market where the expected future returns are very low. The problem with low expected future returns is this means there is a higher possibility of losses in the asset class, and those losses are potentially larger.

We are concerned with something other than returns – we are concerned with the stability of our economy.

You may have heard the phrase “priced for perfection”. In the investing world, this means the asset price is using the best possible scenario as the base case, and any possible negative scenarios are ignored.

I’d argue this is exactly what a reliance on excessive QE does for the market, and what paying people to take out loans does to investments. It forces them to be priced for perfection, where banks are making loans on projects which only make sense if everything works out perfectly.
Banks are smart to be unwilling to loan to projects which are close to being priced for perfection. It’s a reasonable and market driven response to the current situation. High asset prices (and the related low future returns) increase the risk of default and non-payment of loans, and banks are smart to be unwilling to make loans for these projects.
The issues of the FIH (Summers problem #2) and the balance sheet recession (Monitor problem) are related but different problems. The FIH issue relates to causing a bubble, covering cash flows for investments, and the aftermath of the bubble. The balance sheet recession problem relates to the reasonable unwillingness of banks to lend when asset prices are very high.

I think Yglesias whiffed on this one. I am not a huge Larry Summers fan for lots of reasons, but his column from 2012 is actually pretty good.




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74 Responses

  1. stone says

    I think it is important to have at the forefront of our minds that risky investments are needed but that risk needs to be enterprise risk not market risk. Its vital to avoid conflating efforts to develop a new technology with bidding up the value of overpriced pre-existing assets.
    Imagine a situation where creating a new enterprise has an equal chance of causing a 50% gain or a 40% loss. That would be a winning tactic in aggregate but would be stupid for an individual because a 50% gain does not get you back to even after a 40% loss. If everyone were repeatedly taking such risks, we would all prosper in aggregate but the winnings would all go to a few people.
    I’ve had a go posting about this:

  2. beowulf says

    “But no matter who was Tres Sec, O never would have rocked the Wall Street boat in 2009. ”

    Yeah, and that’s probably why he didn’t pick Bra– I mean, Volcker. Tall Paul would have insisted on kicking the thieves out of the temple and wouldn’t hesitate to resign if the President overruled him (which would have been calamitous politically). Obama didn’t want that kind of trouble.

    I have this theory that Democrats tend to nominate their presidential candidates a cycle too early and the Republicans nominate theirs a cycle too late. Carter, Clinton and Obama would all probably done better running for show, or even better, serving as VP before winning the WH (though Clinton was a damn fast learner). On the GOP side, Reagan, Bush, Dole & McCain all lost a step physically or mentally between their penultimate run (76, 80, 88, 00) and winning the nomination (80, 88, 96, 08). Poor Al Gore, if he were a Republican, as a two term VP losing a close race, he’d come back and win the WH 8 years later (which is, after all, what Nixon did).

    • Philip Diehl says

      You’re definitely on to something, beo. I was Treasury liaison with the WH in the first eight months of the Clinton administration when so much went wrong. He and the WH youngsters had so little DC experience they were bound to have a rocky beginning. But coming from a small southern state and knocking off an incumbent, war-winning president everyone said was unbeatable, that went to their heads.

      Clinton was a monster AA hitter. But in AA he had feasted on fast balls. When he jumped to the Show, he found himself flailing at cutters, sliders, and 67 mph curve balls. But the boy was smart. He adjusted and hit Gingrich’s spitball into the mezzanine.

      I wasn’t as young as the WH kids, but I might have made some of the same mistakes, except I had spent two years with Lloyd Bentsen, who learned DC as a protege of Sam Rayburn. I can tell stories of him calling in his senior staff to give our advise on how he should vote on the Persian Gulf war resolution and the Clarence Thomas nomination after the Anita Hill explosion. He listened as we all gave him basically the same advice. Then he did pretty much the opposite. It didn’t take long for us to see he was right.

      All those years of experience were irrelevant to Clinton and his entourage, and we paid the price: the loss of the House in the “Gingrich Revolution” which led to the GOP we know and love today.

      • beowulf says

        Clinton walking into the GOP’s sucker punch is forgivable, Obama walking into the exact same sucker punch 16 years later, not so much. Obama needed to frontload his agenda, Clinton’s biggest mistake was not putting healthcare reform in the 1993 reconciliation bill and putting tax hikes ahead of stimulus. In both cases he was pushed, by Sen. Byrd to limit (filibuster-proof) reconciliation bill focused on taxes and by Fed Chairman Greenspan who conditioned interest rate cuts on Clinton cutting the deficit. Obama had neither of those constraints, Byrd had loosened up and Bernanke literally couldn’t cut rates any lower.

  3. Philip Diehl says

    Do you think there’s an implied comparison here?

    HAMILTON: Yellen as a person. “Yellen is brilliant and tough. She displays this not by needing to prove to you that she’s the smartest person in the room, but instead by always asking the right questions. If someone disagrees with her, her first instinct is not to try to bully them, but instead to try to understand why they have reached a different conclusion than she has. Because of this attribute, Yellen is one of the people I would trust most to be able to sort out what the key problems are and what needs to be done in any new situation.” James D. Hamilton on the Econbrowser blog.

    • Michael Sankowski says

      Congratulations Philip – that was our 13,000th comment here at MR! :)

      Thanks everyone for making this blog what it is! The comments section is where the real action is at MR.

      • JKH says

        OK, so to get in on the fun with greater intensity and focus, the two options I see for myself are:

        a) Start posting in the comments
        b) Start commenting in the posts (through admin)


        • beowulf says

          “b) Start commenting in the posts (through admin)”
          This. Also, if Philip wants to post here, we can set him up with admin acct as well.

      • Philip Diehl says

        Cool! Damn, that’s a big number.

  4. Philip Diehl says

    Ha! Yes, maybe Marie was following “her” own advice about letting them eat cake. Do the Asians even eat cake?

  5. Philip Diehl says
    • Michael Sankowski says

      Thats a great post – thanks for pointing it out.

      I had a boss who was like this for a while. Dude has ruined at least 4 companies or divisions. He’s lost at least $300M in failed companies or divisions, probably closer to $500M. He’s worth about $10M himself due to termination packages he negotiated, so he doesn’t care.

      This is the main reason I think Larry Summers would be a bad choice for fed chair – he’s not a listener. He tries to win debates, not have successful outcomes.

      • beowulf says

        Yeah, and Fed chairman, more than just about any govt job (outside of Japan, at least)) has to be a consensus builder. By tradition the Fed governors and the NY Fed president (that is, the permanent members of the FOMC) always vote the same way as the chairman.

        A vote against the chairman in the FOMC then has always been a minority dissent and never a policy change. However, since permanent members voting as a bloc is by tradition and not by any legal requirement, there’s no reason they have to follow the chair’s lead if he starts pissing them off. If a chairman doesn’t listen to his fellow governors to come up with a consensus policy, he’ll look like a weak reed indeed when he starts losing FOMC votes.

  6. Philip Diehl says

    You’ve presented multiple opportunities for discussion here, Michael.

    First, I think you’re on the money about Summers’ article. We’ve entered another season for Summers-bashing and Larry presents a target-rich environment. But this isn’t one of them.

    Here’s another reason Larry’s right: rather than the Fed incenting companies to invest in marginal projects through negative interest rates, we should be taking advantage of low rates to finance high-value infrastructure projects with deficit spending. But thanks to the Tea Party, fiscal policy has been removed from the arsenal and we’re left with the blunt instrument of monetary policy.

    • Michael Sankowski says

      The government doesn’t respond to market forces like the private sector. This is typically viewed as a bad thing because it builds stuff we don’t want/need and we have a hard time telling if it was a good decision in the end.

      In this case, not responding to market forces is also bad, but it’s because the government isn’t responding to the market demanding more government spending.

      Its crazy to be talking about this after 5 years,but the market is still all but standing on its head and demanding more government investment. Ugh.

  7. joe bongiovanni says

    “However, if we have a choice between giving people money in the form of loans, or simply giving people cash money, I strongly prefer cash money. We do have this choice, so we should probably prefer just giving people money over incenting them to take out loans.”

    There’s probably broad agreement among listeners that the major choices to be made today involve the best options for achieving AD growth that changes idle resources into productive ones, so that actual and potential GDP (?) become economic bedfellows.

    The option between lending people money versus “simply giving people cash money” jumps ahead (people are loan averse at the moment). The stated fact that “We do have this choice” brings the question of how to do it.

    Perhaps some form of government debt issuance could raise a public remittance – that is what Bush the W did. Somewhat counter-productive in the long term.
    Perhaps we could opt for the Platinum Coin option for adding real(cash) money to the national income stream – not clear yet on the BS results as promoted.
    Or perhaps we should consider the Lord Adair Turner proposal for Overt Permanent Money Finance(OPMF), a totally debt-free option advanced after the Big crash by progressive economists Simons and Fisher, and supported by Friedman as the surest means for ending the deep economic and business cycles caused by free capital markets and debt-based money.
    If neither Turner nor Friedman was afraid of being called a ‘socialist’, then why should anyone be?
    Or does this open up the exogenous money taboo?

    • Michael Sankowski says

      I found this group talking about OPMF.

      Positive Money at

      They are allies and we didn’t even know. I’ll reach out to them.

      “Endogenous money” HA! I try to keep the posts limited otherwise I’d end up writing a book for every post. When I am in a writing mood, the problem is too many closely related topics. It’s easy for a simple post – like a comment on someone elses post – to turn into 2,500 words. 2,500 words is too many words for most blog posts.

      But you are correct – Summers is operating from a very endogenous money approach in this column. He seems to have changed his thinking since the Clinton years.

      • JKH says

        “But unlike the funded fiscal policy stimulus considered in Section 6, the stimulative effect of a money financed increase in fiscal deficit will not be offset by crowding out or Ricardian equivalence effects, since no new interest bearing debt needs to be publicly issued, and no increased debt burden has to be serviced in future.”

        Overlooks interest on reserves.

        Presumably those who believe in Ricardian equivalence should also believe in the market’s ability to figure out how a central bank balance sheet works.

        Or should we call that failure Ricardian bewilderment?


        • joe bongiovanni says

          I know your comment was responsive to MS, but are you quoting Turner there, and can you say why ‘interest on reserves’ is relevant to either the notions of ‘crowding out’ or RE, or in any way as an ‘offset to the OMF proposal ?
          The quote seems to be parrying against these knee-jerk responses being raised, simply because no debt is issued and no taxpayer funding required.

        • JKH says

          Irrespective of how one feels about the integrity of Ricardian equivalence as an idea (and it’s a very questionable idea), the quote suggests that Ricardian equivalence if true is a function of interest bearing debt.

          But money financed deficits require the creation of excess reserves, which requires payment of interest on reserves, especially when the central bank lifts rates off the zero bound.

          The only significant difference is the term structure of interest rates on debt versus a presumably short term rate on IOR, mirroring the fed funds target. The cost of the term structure component is a valid point, but reserves will still require a non-zero rate when the central bank moves off the zero bound.

          So my point there was that you can’t falsify (or neutralize) Ricardian equivalence with that sort of argument.

          The general case for Ricardian equivalence is arguably falsifiable, for a few reasons and depending on interpretation, but not with that argument. So I suggested that such a false argument attempting to falsify (or neutralize) Ricardian equivalence is a kind of Ricardian bewilderment.

          I think the crowding out argument is a bit separate, but also falsifiable, if based on purely monetary considerations as opposed to real considerations – and money financed deficits versus bond financed deficits should have no bearing on that either.

        • joe bongiovanni says

          Thanks a lot for the explanation.
          I see the gist of the original quote as pointing out the ‘permanent’ nature of using newly-created money to finance government deficits: as OMF.

          As permanent money, OMF avoids, or evades, the claims of either the crowding-out or RE antagonists. They are simply not an issue as an ‘offset to stimulus’, as the funding source for OMF is neither debt nor taxes. I would agree with that statement, as far as it goes.

          Importantly, you say that ‘because’ the BS effect at the CB is to increase (excess) reserves, and, therefore, the present IOER policy requires ‘an offset to stimulus’ equivalent to that IOER cost – so like one-quarter of one percent of the stimulus, again if I am understanding correctly.

          I’m still trying to figure out why that needs to be the case with OMF funding.
          But, even if so, IOER is a policy initiative that may or may not exist in the future, and all of the OMF funding has a hidden “P” integrated (as OPMF) which makes the fiscal stimulus ‘permanent’.
          IOW, being permanent money obviates the need for any reserves for any CB policy purpose, and perhaps the accounting results from OMF financing should be to decrease, rather than increase, the bank’s required reserves. TOL.

          We operate under a system where all money additions add to reserves.
          But that system itself is a throwback to the gold standard and the use of gold as reserves, a system designed to provide an operating mechanism for the debt-based system of money, where all money comes into existence as a debt issued by a bank. It is antiquated.

          Permanent debt-free money financing of fiscal deficits should not require any reserves. What is there to ‘reserve’ against?

          “The cost of the term structure component is a valid point, but reserves will still require a non-zero rate when the central bank moves off the zero bound.”

          This statement, while both true and realistic, should also provide pause to the paradox of that which comes to the surface in consideration of the public policy initiative of debt-free money. What should be the cost of a permanent term-structure component?

          Thanks a lot.

        • JKH says

          ‘Reserves’ is indeed a very misleading and unfortunate term for what we’re talking about.

          So is ‘settlement balances’ for that matter.

          Basically, if the government spends money into existence, and if it does that using a private banking system as the intermediary, then the banking system is going to end up with bloated deposit balances (also called reserves or settlement balances) at the central bank.

          And if the central bank wants to manage interest rates proactively, it has to pay interest on reserves. And that basically makes reserves not much different from interest paying government debt.

          And that’s why the most important proposal that MMT/Warren Mosler has is a permanent interest rate of zero.

          That’s actually the critical proposal that is required for the rest of MMT to have integrity as a ‘theory’.

          I think very few people are aware of this – although this is just my view on MMT.

          But if you assume that, then what you’re saying starts to fall into place.

        • Tom Hickey says

          JKH, I asked Warren and Scott about your comment. Not their view about the necessity of setting the rate to zero. In their view, setting the rate to zero is a policy recommendation (Warren’s), not a necessity for MMT to work. Warren says the once you understand how the monetary system works and observe the data, then you see that there is no point in interfering with the natural rate of zero where there are continuously excess rb.

          But your statement is too terse to discern your meaning. Not sure what you mean by “That’s actually the critical proposal that is required for the rest of MMT to have integrity as a ‘theory’. I think very few people are aware of this – although this is just my view on MMT.” Maybe you want to break this out.

          Scott, as usual, agrees with the operational analysis.

        • JKH says


          I understand the proposals are optional rather than necessary.

          You’re right on too terse. It’s a habit I have of periodically reminding myself quickly in writing of an idea that’s on the back burner. This one’s been there for a long time. I expect I’ll do a fairly lengthy post on it sometime next year.

          What I’d be getting at is that I think there’s a logical structure to the entire suite of MMT proposals – an interconnectedness – and that zero rates is the most powerful proposal of all (on the pure monetary side – i.e. apart from JG).

          In fact, I’m uncomfortable with no bonds in the absence of zero rates, which is one piece.

          So in that sense, I view zero rates as providing more integrity to the proposal for no bonds (i.e. either reserves or short bills instead of term bonds).

          But then I’m uncomfortable with zero rates for an entirely different reason.

          A bit messy to get into now.

          But they’re both very interesting ideas.

        • Tom Hickey says

          Thanks, JKH. Look forward to it.

        • joe bongiovanni says

          Thanks again.
          Please understand that wanting a permanent overnight interest rate at or near zero is among the few foundational policy initiatives with which I agree with Warren, my MMT adherence being limited to public purpose money – therefore, public money.
          And we rather disagree on how to achieve same.
          My preference is for the monetary authority to set adequate money metrics to achieve GDP-potential inflation-free, and those money-quantity metrics being met by fiscal-monetary actions such as Turner’s somewhat limited OMF proposal.
          I prefer the more comprehensive mechanisms laid out in the Kucinich Bill.

          With adequate money issued debt-free and in circulation to meet the demands of commerce, there is no need for an interest rate policy mechanism, whether IOR or OM operations. Private financial intermediation should establish the borrowing and lending rate of interest, which would have no effect on the real economy.

          More to your point though, is it really the OMF money-issuance initiative that causes the bloated balance sheet of the DIs at the CB? It seems, rather, the vacuous CB policy initiative itself, that of joining QE and IOR that portend the effects of an RE-lite on OMF.

          Considering that these CB policy initiatives are meant to advance the same macroeconomic goal as Turner’s OMF – this being to advance aggregate demand to its non-inflationary potential – the two systemic alternatives deserve an objective comparing and contrasting.

          Turner sees his OMF proposal as limited to the steps necessary to get the economy back on track. However, none of the originators of this policy mechanism – not Simons, Fisher nor Friedman, and especially not its originator in Frederick Soddy – saw it as working in tandem with a more limited continuation of the debt-based money system, colloquially a.k.a. fractional-reserve banking.

          Absent fractional-reserve banking, thereby absent private money-creation as debt, the observations in the ‘original’ quote would become valid. That they are not absent, and their absence not called for in his OMF proposal, I see as Turner’s Conundrum.
          Thanks for pointing that out.

        • JKH says

          thanks – I should probably spend additional time reviewing OMF et al in more detail as well

      • beowulf says

        He’s tight with Brad DeLong who’s been moving in that direction the last few years.

      • joe bongiovanni says

        After Turner gave his original speech which was chronicled and explained there by the PositiveMoney UK Group, Martin Wolf also wrote an uncharacteristically taboo-engaging FT-piece on why such a fiscal-monetary framework is ripe for consideration in today’s debt-saturated monetary economy.
        Dated to the point of Turner’s departure, but perhaps more relevant today.

  8. jt26 says

    I found Summers column a bit odd.
    a) “There is also an oddity in this renewed emphasis on quantitative easing. The essential aim of such policies is to shorten the debt held by the public”. Is it? I thought the aim for Tsy QE was to manipulate the interest rate? Wasn’t MBS QE to stimulate residential real-estate investment/refinancing?
    b) “These examples are the place to begin, because they involve what is in effect an arbitrage, whereby the government uses its credit to deliver essentially the same bundle of services at a lower cost” … but isn’t this arguing against fiscal policy? In his leasing example, wouldn’t he just be shifting the composition of income to the private sector while decreasing the total amount in future years? (BTW I’m not arguing that government should not be more efficient, just that his comment seems odd.)
    c) “It would be amazing if there were not many public investment projects with certain equivalent real returns well above zero.” Why is he saying this with such surety, but somehow the private sector are a bunch of dumbass’s? Socialism isn’t the flaw in his article, arrogance is.
    d) “Any rational business leader would use a moment like this to term out its debt. ” Government should focus on laws and policy, not being the CFO. But perhaps that’s why he failed as a former leader of Harvard and a financial regulator.

    BTW, Mike said:
    “I’d argue this is exactly what a reliance on excessive QE does for the market, and what paying people to take out loans does to investments.”

    The other school of thought is low interest rates and esp. low real interest rates is to make up for the sins of the past (where refinancing is possible in the first case, and where it is not in the latter case). This seems to be the case so far when you look at the huge drop in debt service cost and interest income in the FoF.

    • Arturo says

      One of the best passages in Mosler’s 7DIF:

      I opened with a question: “Larry, what’s wrong with the budget deficit?” He replied: “It takes away savings that could be used for investment.” I then objected: “No it doesn’t, all Treasury securities do is offset operating factors at the Fed. It has nothing to do with savings and investment.” To which he retorted: “Well, I really don’t understand reserve accounting, so I can’t discuss it at that level.” Senator Daschle was looking on at all this in disbelief. This Harvard professor of economics, Assistant Treasury Secretary Lawrence Summers didn’t understand reserve accounting? Sad but true.

      • Philip Diehl says

        More stunning is Larry’s admission that there’s something he doesn’t understand. He’s brilliant, therefore he knows virtually everything that needs to be known about anything that touches economics or economic policy making.

        Isn’t he just making the crowding-out argument against deficits?

        When did this exchange occur and in what context?

        • beowulf says

          Hard to pin down time frame of Warren’s story because I don’t think Larry was ever an Assistant Secretary ( I believe his progression was Under Secretary to Deputy Secretary to Secretary). Sometime in the 1990s let’s say. :o)

        • Philip Diehl says

          I think that’s correct. He occupied a palatial office two doors down from my humble abode and proceeded to redecorate it in the manner of Versailles.

        • Arturo says

          Please, God, say he wore pantalons and a powdered wig. Or better yet, dressed up like Marie Antoinette.

        • Greg says

          “Please, God, say he wore pantalons and a powdered wig. Or better yet, dressed up like Marie Antoinette.”

          Arturo, thats at least two days in last three with the comment of the day. Its nice to see you here. Where you been?

        • Philip Diehl says

          No, but I do recall during the Asian debt crisis him puttering something about them eating cake.

        • Arturo says

          Should have provided a link, sorry. Starts on p 41.

        • Arturo says

          Note that it was a very private admission.

        • Philip Diehl says

          Wow. “And now for something completely different.” I’ve picked up some of this in these blog posts and comments and found it worthy of head-scratching.

          I’m PDS he never met with Secretary Bentsen while I was chief of staff, not at Treasury anyway, and I doubt that he did after. I can’t speak to whether he met with Rubin.

      • beowulf says

        Question for Philip Diehl, since this must have happened while you were Secretary Bentsen’s chief of staff, I’m curious if Warren (I guess via Daschle) ever gave his pitch to you or the Secretary?

        • JKH says

          I guess that’s one steam room missed.

        • beowulf says

          “I guess that’s one steam room missed.”

          Sadly, I think John Travolta has killed the concept of a platonic steam room meeting.

        • Arturo says

          Scream laugh–there’s today’s QOTD.

        • Philip Diehl says

          Sorry. I’ve lost the context. Warren who and what pitch?

        • Arturo says

          Philip, the references (including movers and shakers cajoling in steam bath) are in Warren Mosler’s book. Here’s the link again:

        • Michael Sankowski says

          Awesome – I’d be very excited to hear.

          Also, it seems like Larry has shifted his thinking a bit since the clinton years.

  9. SqueekyWheel says

    “The first – poor certainty of returns – seems like a bad investment anyway, and probably not ones we should choose for our economy.”

    DARPA, ARPA, NASA, atomic physics, battery research, solar, polymer chemistry, magnetism, super conductors, ….

    There are a whole host of unlikely to work projects, and a few of them have enormous returns, even if most fail. These are good things for our economy, but few companies have the risk appetite or willingness to give up returns to fund them, so the government funds them and is unconcerned if someone else monetizes them.

    I’ve always thought that recessions are a great time to invest heavily in R&D (ok, its a great time to invest heavily in anything). R&D at least has the chance of sparking a technology advance which can get one out of the recession.

    • Greg says

      One thing that strikes me about most of that list Squeeky is that it involves projects which could potentially affect market share of big energy companies. Breakthroughs in solar, batteries or superconductors are not something the likes of Exxon, BP and large utilities are hoping to see, unless they make the breakthrough (which I doubt they are even investing much R&D in). Those areas of game changing potential breakthroughs are up against powerful interests that are likely saying no and funding congress critters to delay and defund projects.

      • Arturo says

        OTOH, those large companies are also significant employers. Disruptive technologies don’t just ‘disrupt’ past winners.

        As frustrating (and at times frightening) as our political system can be, it was designed to manage a society through this kind of stuff. Pretty freakin’ amazing over the long term.

        • Greg says

          “OTOH, those large companies are also significant employers. Disruptive technologies don’t just ‘disrupt’ past winners.”

          Very true, and they have a lot of good paying jobs as well.

          Also true about the resilience of our political system……. until lately. One of the problems with the modern GOP is their insistence that the way its always been done doesnt work. All these efforts to paint govt as incompetent and untrustworthy have born out as the GOP has taken more power. Amazing how people who dont believe in govt govern so poorly!!

        • Philip Diehl says

          So true, and it’s not limited to the TP wing of the GOP. Since the Gingrich revolution the Party has sought to discredit the federal government by acting to ensure its failure on a wide range of fronts. For example, over the course of six years, a group of us at the Mint transformed the place into a highly profitable and entrepreneurial business, enough so to get a set of feature stories in Fast Company magazine.

          I knew if the GOP won back the Senate in 2000, the chairman of Senate Banking, the loathsome Phil Gramm of my home state, would try to rip out everything we did. Sure enough he made certain W appointed a director that shared the mindset, and she proceeded to do just that, including most critically, destroying the culture of the place and running off the best people. The only things that survived were reforms we bolted down in law.

          Gramm didn’t care about any specific thing we did. He opposed the example we set as a federal agency that met some of the highest performance standards of the private sector and received a lot of high-profile media coverage as a man-bites-dog story. We were counter-“factual” to the core of the GOP’s ideology.

          The same is true with the failure of the financial regulatory agencies. They struggle to do their jobs under the best of circumstances, especially as the market and the banks become more complex and opaque. Then the GOP cuts their budgets, reduces their legal authority, attacks their credibility with the public, blocks appointment of their leadership, and when the GOP owns the White House, appoints people who are hostile to their mission. Voila! Government can’t do anything right. What must be done is then outsourced to the GOP’s campaign contributors.

        • Greg says

          You can probably speak more to this than I can Philip, but as I understand it the post office is another example of what you refer to in your Mint example. Hasnt the post office, for at least a decade , been entirely self sufficient, raising all the revenue they need off letter and package delivery rates? I understand that their retirement fund is run much more like the miitarys is, at least til recently, such that its much more secure than say UPS’s employees, but that all other operating costs are covered simply by the cost of core service they
          provide, which really isnt very expensive when you think about it. And of course the GOP is wanting to blow it up. Cant have anything federal actually work well!!

        • Philip Diehl says

          USPS is a good example. In the 1980s Reagan and the GOP Congress ended the USPS monopoly on package delivery, handing the business to their GOP allies, the founders of UPS and FedEx. I can’t remember their names.

          There were some good things that came out of this. But it set off an inevitable deterioration of USPS service and finances. Since the 19th century, USPS had provided universal mail service wherever you lived, subsidizing higher-cost rural package delivery and rural and urban mail service with profits from urban package delivery.

          As soon as the market was opened, UPS and FedEx cherry picked the lowest cost urban package market and then began a relentless devouring of the next lowest cost markets as they tapped economies of scale and scope. USPS was forced to return to Congress repeatedly for increases in postal rates, each time giving the GOP an opportunity to pillory the postal unions, who they blamed for deteriorating service and rising rates. 20 years earlier they wouldn’t have gotten away with it because the postman was a person who came to your door. No more. With the change in American lifestyles, mail delivery became anonymous and USPS lost its human face for most Americans.

          I actually ran the numbers on this a few months ago but I don’t have them at hand. Adjusted for inflation, since the early 1980s the cost of 1st class mail has risen very modestly, the cost of package delivery has fallen substantially, and the earning of postal workers has fallen.

    • Michael Sankowski says

      This is a really good point about risk and reward.

      The projects you mention have gigantic “possible” rewards, but the uncertainty is very high for any individual avenue of research. If you invest in any specific avenue of research in these technologies, there is a significant chance of losing all of your money.

      Yet, these technologies almost certainly are civilization changing. We as a civilization will hugely benefit when the science, engineering, and practical technology is figured out.

      Private sector funding of projects like this tend not to happen because the payoff is so skewed. They are bad investments for nearly everyone, even though the investment as a civilization might be a huge winner. While the expected payoff might be positive, the vast majority of end results are losers.

      • Arturo says

        It’s essentially a form of risk sharing, which shouldn’t be hard to explain to Tea Party types, or (all but the most hardcore) libertarians who acknowledge a need for national defense. More a matter of degree than principle. Among supply siders, Laffer clearly gets it and even publicly admits it once in awhile.

        It’s not hard to show that public investment has always gone hand in hand with private-sector well being, here and abroad. When Obama said, “You didn’t build that,” he was bang on. He just f’d up the delivery in a big way.

  10. JKH says

    Agree that’s a pretty good column from Summers. Not many people focus on the debt term extension “arbitrage” he points to.

    General (philosophical?) question:

    Why do people (in general) write critically of QE as if the CB has the option to do fiscal instead? It doesn’t – not in the operating world in which we live. So the CB does what it can – right or wrong, effective or ineffective – that’s all it can do, in the absence of fiscal from the operating unit that can do it. But why do people choose to argue urgent practical choices in the context of imaginary choice space?

    • Philip Diehl says


      Probably because criticism is mistaken for intellectual firepower. When we start recognizing the constellation of practical constraints limiting policy choices we move from criticism to analysis and, god forbid, grokking.

      • Arturo says

        So here we are, emotionally charged up and ready to get our ‘mob on’ in order to tar and feather Lawrence, when the temperance movement that is Philip Diehl strolls in to make the case for sobriety and fairness. Killjoy. 😉

        How about a new meme? A Philjoy is anyone who tries to move a conversation from emotional volatility toward sober analysis and better understanding; and occasionally a good grocking.

        • Philip Diehl says

          Ha! This is a far better association than the one I picked up as a college nickname, BF Diehl, or the moniker bestowed on my legacy product, the 50 State Quarters, by wags at the Mint: Diehl Dough.

        • Arturo says

          BF Diehl…that’s fantastic!

    • Erik V says

      I think there is actually a good response to that question. Both theory and recent experience has shown that the Fed’s words are more powerful than it’s actions when it comes to reducing long-term rates. QE1 and QE2 were both associated with rising long term rates. The Fed’s forward guidance regarding the Fed Funds rate pushed long-term rates down considerably. So the Fed could get the same stimulative effect of lower long-term rates without the negative side effects of blowing financial bubbles left and right via the portfolio rebalancing effect that’s happening now.

    • Arturo says

      “why do people choose to argue urgent practical choices in the context of imaginary choice space?”

      Great question. I suspect the third word in it is your answer? 😉

  11. Arturo says

    Michael, agreed, and the Summers vs Yellen debate is frustrating the hell out of me. He has shown himself to be a complete and utter dumbass whose main skill appears to be failing upward. However, he’s absolutely right about fiscal vs QE, imo.

    • Greg says

      Hey Arturo dont sell the man short!!
      How many guys do you know that can fail upwards as well as Larry? It might take more skill than you know.

      Sure wish I could

      • Arturo says


        How about a ‘failing upward’ pact? If one of us figures out his secret, we hereby agree to share.

        In fairness, while Larry deserves a sh*t ton of criticism imo, his paper on Gibson’s Paradox was pretty slick. Maybe Barsky did all of the work…?

      • Philip Diehl says

        I can assure you Larry is not dumb. He’s one of the smartest people I’ve ever worked with, and I worked with him a lot. He is also one of the most arrogant and tone deaf people I’ve ever met, and he must have an EQ below 100.

        I’m not a fan but he rose in my estimation when I heard he was a strong advocate for prosecuting the worst of the banksters. Obama went with Giethner who didn’t want to “destabilize” the economy.

        • beowulf says

          Did you read Ron Suskind’s fantastic book Confidence Men?

          Larry’s re-appt to Tsy apparently was waylaid by Hillary Clinton accepting State. Obama didn’t like the optics of having another Clinton retread in his cabinet. The astonishing thing is that when forced to pick a Tsy Sec from between Paul Volcker (who very much wanted the job) and Tim Geithner, Obama decided Geithner was the man for the job.

          The closest analogy I can think of to as to how terrible a decision this was (whether on the metric of experience, public reputation or basic competence) would be if, tomorrow, Bill Belichick announced he was benching Tom Brady and naming Tim Tebow as New England’s starting QB.

        • Philip Diehl says

          Ha! Both an apt and a disturbing analogy. I think Geithner probably had the job on his first meeting/interview with Obama. They’re very simpatico. Volker is old school and hot. Geithner is O’s age and cool. But no matter who was Tres Sec, O never would have rocked the Wall Street boat in 2009.

          Clinton brought Bentsen in as his eminence grise and then used him as a Senate lobbyist. Obama didn’t feel the need for one at all.

          I would have had Simon Johnson and Krugman on the short list along with Volker. Geithner did not fit the Team of Rivals O professed to be his model. In fact, who on the cabinet fits that model?

        • Arturo says

          “I heard he was a strong advocate for prosecuting the worst of the banksters. Obama went with Giethner who didn’t want to “destabilize” the economy.”

          Hadn’t heard that, thanks. Worth a few points.

          And I believe he’s intelligent, but in total, his political judgment has proven to be much worse than lousy. Might have to do with the emotional intelligence thing.

          Finally, in my oversimplifed view of the world, he’s a poster child for the worldwide scourge that is Rubinomics. Too harsh?

        • Philip Diehl says

          Probably not. I think his participation in the suppression of Brooksley Born’s dissent as describe in 13 Bankers was close to reprehensible. But unlike Rubin, Geithner and Greenspan who have retired into their cones of silence or become defenders of the status quo, I think Larry may have learned a few things from the 1990s.

    • beowulf says

      Or if it were a movie tagline— sometimes the bad guy is the only guy you can trust.

    • Detroit Dan says

      Excellent post by Mike, and Arturo’s pithy summary is the quote of the day in my book….

      • Michael Sankowski says

        Agree – QotD.

        A problem: Summers believes winning an argument is more important than getting a good outcome. He’s used to being correct, which is a dangerous. He’s one of those people who think an argument is won by being louder, and then if not louder, then pure logic. He doesn’t see anything but the winning and losing as being important. So this means he will seize on minor parts of your argument, blow them out of proportion, then claim victory when he demolishes these unimportant parts. It’s the old “Assume your strongest points are wrong. Then, these weaker points are clearly wrong, so you are wrong.”

        People who are not used to debating get run over by people like this, and this tactic then tends to totally stifle about 60% of the population. We end up being ruled by loudmouths like Larry Summers.