Monetary Policy Takes Center Stage: MMT, QE Or Public Banks?

As alarm bells sound over the advancing destruction of the environment, a variety of Green New Deal proposals have appeared in the US and Europe, along with some interesting academic debates about how to fund them. Monetary policy, normally relegated to obscure academic tomes and bureaucratic meetings behind closed doors, has suddenly taken center stage.

The 14-page proposal for a Green New Deal submitted to the US House of Representatives by Congresswoman Alexandria Ocasio Cortez does not actually mention Modern Monetary Theory, but that is that, it’s e approach currently capturing the attention of the media – and taking most of the heat. The concept is good: abundance can be ours without worrying about taxes or debt, at least until we hit full productive capacity. But the devil is in the details….

MMT advocates say the government does not need to collect taxes before it spends. It actually creates new money in the process of spending it; and there is plenty of room in the economy for public spending before demand outstrips supply, driving up prices.

Critics, however, say this is not true. The government is not allowed to spend before it has the money in its account, and the money must come from tax revenues or bond sales.

In a 2013 treatise called “Modern Monetary Theory 101: A Reply to Critics,” MMT academics actually concede this point. But they write that “these constraints do not change the end result,” and here the argument gets a bit technical. Their reasoning is that “The Fed is the monopoly supplier of CB currency [central bank reserves], Treasury spends by using CB currency, and since the Treasury obtained CB currency by taxing and issuing treasuries, CB currency must be injected before taxes and bond offerings can occur.”

The counterargument, made by American Monetary Institute researchers among others, is that the central bank is not the monopoly supplier of dollars. The vast majority of the dollars circulating in the United States are created, not by the government, but by private banks when they make loans. The Fed accommodates this process by supplying central bank currency (bank reserves) as needed, and this bank-created money can be taxed or borrowed by the Treasury before a single dollar is spent by Congress. The AMI researchers contend, “All bank reserves are originally created by the Fed for banks. Government expenditure merely transfers (previous) bank reserves back to banks.” As the Federal Reserve Bank of St. Louis puts it, “federal deficits do not require that the Federal Reserve purchase more government securities; therefore, federal deficits, per se, need not lead to increases in bank reserves or the money supply.”

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Gary Anderson 1 year ago Contributor's comment

I think public banks have a place. But MMT is not the vehicle that will give public banks a good reputation.

Alan Longbon 1 year ago Contributor's comment

Hello Ellen,

Great to find you writing here. This is a quote that I regularly post in reply to scaremongering about the national debt.

"Under current institutional arrangements, governments around the world voluntarily issue debt into the private bond markets to MATCH $-for-$ their net spending flows in each period. A sovereign government within a fiat currency system does not have to issue any debt and could run continuous fiscal deficits (that is, forever) with a zero public debt."

(Source: Professor William Mitchell, 2014)

Issuing "debt" is totally and utterly not necessary.

If the Federal Government made two key changes there would be no need for treasury issuance and these are:

1. Change the law so that Federal deficit spending was not matched with treasury issuance.

2. Set a support rate on the Federal Fund Rate instead of a target rate so that the buying and selling of treasuries are not used to maintain the target rate.

The 'national debt' would roll off in a few months as treasuries were converted to dollars again. From savings account to checking account just like your savings at a commercial bank.