Keynesians, Monetarists, and Minskyites: Opening of September 13, 2010 U.C. Berkeley Econ 1 Lecture - Grasping Reality with Both Hands
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Grasping Reality with Both Hands The Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, RealityBased, and Even-Handed Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.
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Keynesians, Monetarists, and Minskyites: Opening of September 13, 2010 U.C. Berkeley Econ 1 Lecture Keynesians Last time we ran through two types of recessions, “Keynesian” type and “monetarist” type—the one we saw in 2002 and the other we saw in 1982. In a “Keynesian” downturn the fundamental financial excess demand in the economy is an excess demand for bonds: an excess of (planned) savings over business investment. Households try to shift their spending from purchasing current goods and services to purchasing bonds and other investment vehicles to carry purchasing power forward into the future. The shift in spending away from currently-produced consumption goods and services puts downward pressure on employment and production in those industries. But where is the excess demand for labor to pull the newly-unemployed into new occupations? Perhaps as bond prices rise and interest rates fall businesses become exuberant about expanding their productive capacity, boost business investment spending, and excess supply in consumption-goods industries is offset by excess demand in investment-goods industries and the economy smoothly rebalances. But perhaps not—perhaps businesses don’t become exuberant, or perhaps (as happened in 2002) interest rates fall to their floor near zero, and there still is not enough incentive for businesses to invest enough to make them want to borrow enough to soak up the savings glut. And then the downward spiral of the multiplier kicks in: falling production and employment means falling incomes means further reductions in spending and further reductions in production, employment, and incomes. The cures for a Keynesian downturn are for something to happen that brings the supply and demand for bonds back into balance—for interest rate reductions to induce exuberant businesses to print bonds so as to borrow and fund investment spending to expand
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capacity, for interest rate reductions to reduce the value of the currency and so boost exports which are then paid for by foreigners’ selling their own dollar-denominated bondholdings into the market, for the government to sell bonds and use the proceeds to bring spending forward into the present and push taxes back into the future. Standard monetarist cures—for the Federal Reserve to buy short-term government bonds for cash—are ineffective because an excess demand for liquid cash money is not the problem, except insofar as the Federal Reserve’s open-market purchases trigger enough of a reduction in interest rates to sufficiently boost either business investment spending (and bond issues) or net exports (and foreigners’ bond sales). Monetarists In a “monetarist” downturn the fundamental financial excess demand in the economy is an excess demand for liquid cash money: an excess of (desired) cash holdings over the economy’s money stock. Households try to shift their spending from purchasing current goods and services to building up their cash balances to achieve their desired liquidity. The shift in spending away from currently-produced consumption goods and services puts downward pressure on employment and production in those industries. But where is the excess demand for labor to pull the newly-unemployed into new occupations? Perhaps as households dump bonds on the market to try to build up their cash holdings bond prices fall and interest rate rise enough that households notice the high opportunity cost of holding cash and reconfigure in order to be satisfied with much lower liquid cash money holdings. But perhaps not—perhaps (as happened in 1982) interest rates rise but households and businesses still want to build up their cash holdings. And then the downward spiral of the multiplier kicks in: falling production and employment means falling incomes means further reductions in spending and further reductions in production, employment, and incomes. The cures for a monetarist downturn are for something to happen that brings the supply and demand for liquid cash money back into balance—for interest rate increases to induce households and businesses to reconfigure their operations in order to get along with much smaller liquid cash money holdings, for a general fall in the price level to reduce the flow of nominal spending needed to maintain the economy at full employment and normal capacity, for the central bank to simply expand the money stock by buying bonds for cash, or for the banking system to accept more deposits for each dollar of its own reserves and thus run itself a little closer to the edge of vulnerability to a panic. Keynesian cures—for the government, say, to print up a bunch of bonds and engage in deficit spending—are ineffective because an excess demand for bonds is not the problem, except insofar as the government’s bond issues trigger enough of a rise in interest rates to induce a sufficient reconfiguration so that households and businesses can carry out their normal spending plans with less liquid cash money in their reserves. Minskyites But today we have a different type of economic downturn: not a Keynesian downturn triggered by an excess of (planned) saving over investment, not a monetarist downturn triggered by an excess of desired liquid cash money holdings over the available money stock, but a Minskyite downturn triggered by an excess (planned) demand for safe high-quality assets. On the one hand, a great deal of the asset pool that people had regarded as safe and high quality—as nearly as good as Treasuries—is gone, or at least definitely no longer regarded as a safe place to park your wealth so that it will still be there when you come back. On the other hand, the fact of panic and the lack of trust in http://delong.typepad.com/sdj/2010/09/keynesians-monetarists-and-minskyites-opening-of-september-13-2010-uc-berkeley-econ-1-lecture.html
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governments’ abilities to stabilize the economy has greatly increased the share of portfolios that investors wish to hold in high-quality even if low-yielding vehicles. There have been lots of Keynesians and monetarists developing their approaches and fighting it out since, well, since the days of Irving Fisher and Knut Wicksell more than a century ago. That is the reason why their arguments go so smoothly. But there have been fewer Minskyites. And I am not smart enough to make the argument as polished. So this lecture will be considerably rougher. Brad DeLong on September 07, 2010 at 10:57 AM in Economics, Economics: Macro | Permalink Favorite
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Comments jcb said... BD, All your explanations of the causes of depressions are "monetarist" in the sense that all three assume that businessmen and consumers are motivated, in the first instance, by rational considerations about where or how to place income -- cash, bonds, "safe" assets. And, as a corollary, that these decisions are mediated by the rate of interest. But aren't these second-order financial considerations based on the assumption that businesses and consumers have a surplus of income over immediate needs? More immediate considerations are: what to consume (or invest) out of the income (or profit) you earn (or anticipate earning), and whether or not to take on debt (or whether or not loans can be found) to bridge the gap between present income and expected/hoped for income. Where in your analysis, for example, is debt and the need to pay it down? By ignoring the primary economic motivations of immediate needs (or hopes) for consumption and investment, in favor of second-order rationalist calculations about where to put a surplus, I think you confuse the issue and obscure the solution. Please enlighten . . . . Reply September 07, 2010 at 01:02 PM David Merkel said... I look forward to the second installment on this. Looks promising. Reply September 07, 2010 at 05:35 PM
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dilbert dogbert said... The wife went Minsky with the proceeds from the sale of a house. After two years of no income from the proceeds and our spending it down on living expenses she just bought two rentals. Wish us luck. With some luck the income from the rents will cover the extra spending and the principal will stabilize. We are doing our best to get the economy going. Irvine Renter has posted a number of times on big time investors buying F/Cs in mass. Most are looking for a flip but some are doing rentals. Reply September 07, 2010 at 08:26 PM Comments on this post are closed.
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Keynesians, Monetarists, and Minskyites: Opening of September 13, 2010 U.C. Berkeley Econ 1 Lecture - Grasping Reality with Both Hands
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