Home > Uncategorized > Mike Konczal and Josh Mason on the Ideal Central Bank

Mike Konczal and Josh Mason on the Ideal Central Bank

We’re publishing some expert ideas about the future of the ECB and monetary policy. Three days ago some ideas of Willem Buiter were published, two days ago some ideas from Richard Werner and yesterday ideas from Thomas Mayer. Today some excerpts from a recent paper by Mike Konczal and Josh Mason. They are not part of the Handelsblatt Shadowcouncil but their ideas often tally with those already published:

  • Pure ‘inflation targeting’ is (mortally?) compromised
  • Hence, central banks are overburdened and need to share responsibility for stable economic and financial development with (other parts of) the government
  • But there are serious coordination issues (this looms larger in the Eurozone than in the USA) with regard to management of monetary/fiscal policy as well as with regard to macro and micro allocation of credit
  • ‘Credit guidance’ (which the government is already doing, think for instance about the deductability of mortgage interest in many countries) has to be rebooted and aimed at long-term productive investment. Opinions differ about the exact shape of this.
  • But it does mean that increased democratic and social accountability is important

There are substantial policy questions about the ways in which the Federal Reserve stimulates the economy by hitting the gas pedal or brake, by way of increasing or decreasing the single interest rate, is consistent with larger economic goals, including ensuring financial stability, fostering productive investment and good jobs, and directing society’s resources toward urgent social problems, such as climate change. In particular, we review recent proposals for modifying the inflation target of monetary policy and for allowing the overnight interest rate to move below zero. We explain why we believe these changes to the conduct of monetary policy are not sufficient by themselves to reliably maintain full employment. Finally, in Section Three, we suggest other approaches that we believe the Federal Reserve should explore and adopt as part of their toolkit. Six stand out for us:

  1. Setting long-term interest rates
  2. Increasing support for public borrowing
  3. Purchasing state and local debt
  4. Coordinating Treasury and Federal Reserve policy
  5. Purchasing a greater range of private debt
  6. Shifting from a monetary policy to a credit policy framework

This list is not meant to be exhaustive or definitive, but we hope that it can begin a broader discussion of expanding the scope and scale of interventions by the Fed. The economy’s ability to weather recessions, and to meet human needs even in good times, depends on the Fed getting out of the narrow box it trapped itself in before 2008 and is only just finding its way out of today

[about 6. they state, among other things]

Central bankers like to think of themselves as mere custodians of the financial system, but the social function of finance is to allocate society’s scarce resources among investment projects. Finance is responsible for redirecting economic activity—a role that is especially critical at times when major changes in the direction of activity are necessary. Due to the looming threat of climate change, this is such a time. The terms and availability of finance will be a central factor in determining how (or if ) carbon-based energy sources are phased out; vulnerable coastal communities are protected or relocated; existing structures are refitted to reduce energy use; land use patterns are reshaped to reduce reliance on the automobile; and the scarce resources of water and arable land are developed, allocated, and safeguarded. All of these choices require large, upfront expenditures to generate even larger, but distant and uncertain, returns: in short, what banks are for. These questions, and other similar choices about our collective productive activities, will determine whether our grandchildren continue enjoying rising living standards and social stability, or whether they face a new age of conflict and scarcity. As the ultimate arbiter of credit and finance, the Fed has a central role to play here. Like it or not, the central bank is a central planner, shaping both the character and the level of economic activity. It should embrace this role—and the democratic accountability that goes with it—and exercise itspower toward the public good.

  1. Risk Analyst
    December 10, 2017 at 9:02 pm

    I find the Konczal paper unhelpful and believe an implementation of it by current players would simply mean that long term interest rates would have more emphasis in their DSGE models. That would remedy little. If asked to provide a list of suggested changes, the first item should be to create balance in the member bank’s economics departments, the district presidents, and Board members with respect to schools of thought. As pointed out at length in this forum, the neoclassical school has far too much dominance. They fundamentally are not capable of looking at things in any other way. A leading indicator of their thought and direction is the topics of their working papers, and a perusal of the Fed Board’s 2007 working papers show no ability to understand what was about to happen in the economy. They need diversity and inclusiveness. I still don’t get how the Fed macroeconomists can call themselves macroeconomists when they missed the biggest economic event of their lives even while provided any and all resources needed for their studies.

    • December 10, 2017 at 11:46 pm

      Exactly why I ask us to apply already standard accounting practices that include costs born by people and planet as well as social goods created cooperatively.

      The math is not glamorous yet legions of young eco graduates would be busy with good paying jobs for a long time.

  2. December 12, 2017 at 3:21 am

    Well, I did find something worthy of applause in the Konczal/Mason report, which was their emphasis on the desirability of CB ‘credit intervention’ with respect to particular economic investment opportunities.

    What I actually liked about this is not so much the emphasis they placed on the desirable outcome of particular investments (though I agree that there are gains to be reaped here), but rather the very idea that central banks should concern themselves with the amount of lending that is occurring in particular markets.

    My emphasis is on the CB’s ability to fight inflationary pressures in particular markets with strict credit controls that affect only certain groups of borrowers. In particular, I think it is very ‘doable’ to make the cost of credit to speculators (often banks and other financial institutions) so prohibitively high, they they’d be discouraged from trying to make a fortune on rising prices through heavily leveraged purchases of commodities and other assets.

    With a willingness to restrict the supply of ‘loanable funds’ for these customers, a CB could actually deflate some of these asset bubbles—driven by cheap credit—before they develop to the point of creating systemic risks.

    I consider this Central Banking “tool” to be supremely important, because with it, a CB can bank the fires of inflation in particular markets without sending the entire economy lurching into a recession.

    So yes, I think Konczal & Mason are on the right track re: this emphasis, although for reasons they never really addressed in their report…

  3. December 12, 2017 at 4:01 am

    On the general topic of the Fed’s response to the 2008 Financial Crisis, which the authors focused a lot of attention on, I think it’s important that observers understand that there was actually never any need for Fed Chair Bernanke to join Treasury Secretary Paulson in begging Congress to authorize $700 billion to bail out threatened financial institutions.

    September 18: Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke meet with key legislators to propose a $700 billion emergency bailout through the purchase of toxic assets. Bernanke tells them: “If we don’t do this, we may not have an economy on Monday.

    The actual truth of the matter was that the Fed could have bailed out all of the threatened industries all by itself, without any help from Congress, with the authority it had at the time. That much was revealed when the Fed announced it would be buying up the worthless assets of AIG (with money it creates with a keystroke).

    There was a very important reason why they orchestrated this great political drama for the eyes and ears of members of Congress.

    It was quite simply to give themselves political cover for what they were about to do. If they had simply acted on their own, the political world would have watched with amazement as the bankers’ bank bailed out all of the Bad Guys on Wall Street for their economic sins, using money created out of thin air.

    Bernanke, et al., knew the Federal Reserve System would not likely have politically survived such a blatant display of oligarchic power, so they had to get the vast majority of members of Congress to “put their own skin in the game”, to make the dramatic intervention in the economy their own.

    This way, members of Congress would be the ones standing before the microphones to defend their actions to bail out the millionaires and billionaires on Wall Street.

    It was a brilliant move, actually. (In a very evil sort of way…)

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