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Sunday, November 13, 2016

Central Banks as Pawnbrokers

 Lord Mervyn King (Governor of the Bank of England from 2003 to 2013) wrote “The End of Alchemy: Money, Banking, and the Future of the Global Economy.” [1]  In it, he discusses a proposal for the reform of the banking system, which he refers to as the “pawnbroker for all seasons” (Chapter 7). The proposal is very similar to one I discussed in Understanding Government Finance – which was proposed by Hyman Minsky, which in turn was based on central bank operating procedures from before World War II. I agree with Lord King about the proposal, however, my interpretation of how it should be implemented differs. At the root of the issue is my feeling is that his worldview shares too many assumptions taken from Monetarism.

(Note: This is an unedited first draft from my next book: Abolish Money (From Economics)! The text of the book is now complete, and I am in the editing process. I expect to publish it in January.)

A Pawnbroker for All Seasons?

One of the advantages of the proposal is that it greatly simplifies bank regulation. Almost all of the entire existing banking regulatory scheme could be thrown in the dumpster, and replaced by two basic principles (please note that this is my rephrasing of the text used in the book):
  1. All financial entities that issue short-term financial liabilities (including bank deposits, in case that is not obvious) must ensure that their effective liquid assets are at least the same size as their short-term liabilities (he uses one-year maturity as a cut-off). (In this text, I use “bank” for simplicity, but it must be emphasised that non-bank financial entities are caught up in this regulatory web as well.)
  2. Effective liquid assets are defined as the sum of the value of firm’s assets after taking into account a liquidity haircut that is defined by the central bank (based on the class of assets). This is discussed further below.
The haircut can be between 0% and 100%. An asset with a 0% haircut counts entirely towards the effective liquid asset total is viewed as completely liquid – for example, a deposit at the central bank (what people might think of as “bank reserves”). Conversely, some toxic piece of financial engineering (such as a CDO-squared) would get a haircut of 100%, and would not count at all towards effective liquid assets.

For example, take the classic case of a bank with assets that consist of $10 in balances at the central bank, and $90 in bank loans. If the loans all fell into a category for which the haircut was 50%, the effective liquid asset total of the bank is calculated as $55 ($10 for the reserves, and $45 for the bank loans). The implication is that the bank cannot have more than $55 in short-term liabilities; the remaining $45 would have to consist of long-dated bonds and equity.

(The only part of bank regulation that would also be needed is the regulation of the breakdown between long-term debt and equity. In theory, it should not matter too much, as if the entity falls to a negative equity position, regulators have a year to do a debt restructuring. In practice, regulators are not going to want to have large universal banks holding the economy hostage by threatening to go bust at a bad time.)

Importantly, the “haircuts” are not just a regulatory concept, like asset risk weightings in existing regulatory regimes. The central bank is committed to lend against those assets on demand, with the amount of the loan set by the largely fixed haircut schedule. (The central bank may revise those haircuts, but only at infrequent intervals, such as three years.) The interest rate on such loans would be at a fixed spread to the policy rate of interest.

Full reserve banking (“100% bank reserves”) can be viewed as a special case of this scheme. In full reserve banking, the haircut on all assets other than settlement balances at the central bank and Treasury bills is 100%.

Difference from Bagehot’s “Lender of Last Resort”

Such central bank lending is a form of lender-of-last resort operation. However, King observes that there is a difference from Walter Bagehot’s formulation: the central bank should lend freely against good collateral. What we see in practice is that banks “optimise” their balance sheets during the expansion phase of the cycle, and they keep the regulatory minimum amount of unambiguously “good” collateral. When the crisis hits, all they are stuck with is “bad” collateral.[2]

By pre-committing to lend against specific classes of assets at fixed haircuts, the central bank is going to lend against almost any collateral in a crisis (although it would likely rule out in advance fixed income securities it cannot price, or equity securities, by setting the haircut at 100%).

Back to the Future

I have advocated a similar scheme, so I certainly agree with the basic principles behind Lord King’s suggestion. However, I have some reservations about the implementation – I believe that central banks need to embrace this concept even more forcefully. Instead of just being an operation undertaken during a crisis, central bank lending against private sector collateral should be done on a full time basis.

My analysis is not particularly original; my arguments were based on Hyman Minsky’s; for example, he discusses this in Chapter 13 of Stabilizing an Unstable Economy. [3] (My summary was published in Chapter A.2 of Understanding Government Finance.) Meanwhile, his comments were based on returning central bank operations to how they were undertaken in earlier eras, such as the Bank of England before World War I.

The difference between the two conceptions is that the central bank’s balance sheet will consist almost entirely of discounted private sector assets. (This is sometimes referred to as an “overdraft economy,” as discussed in Marc Lavoie’s Post-Keynesian Economics: New Foundations. [4]) By necessity, banks (and selected “shadow bank” institutions) would have to go the central bank for short-term financing, and the central bank staff would be forced to follow closely the trends in assets held by the banking system. If the central bank does not like the risk profile taken by banks, it eliminates the short-term financing for the dodgy lending, forcing the banks to either use long-term financing to fund the positions – or stop making the dubious loans.

The central bank will thus always be forced to keep an eye on what the bankers are up to, and nudge the private sector towards less self-destructive paths. We would not repeat the experience of the Financial Crisis, where central banks suddenly woke up to the reality that they had no idea what private financiers had been up to over the past decade.

Of course, there will still be ugly shocks. The reality is that lending standards will always be pro-cyclical; the shifts in “animal spirits” almost entirely defines the business cycle (other than the case of boneheaded policy-induced recessions, such as in the euro area periphery). Central bankers are human, and so they will be sucked into the latest investment fads as well. However, their institutions cannot go bust, and so they will be in a good position to work things out. As long as the private banks survive the crisis, the central bank not be exposed (since the loans are to the banks; losses on collateral only matter if the borrowing bank fails).

It would have been interesting to see how Mervyn King compares his proposal to the analysis of Minsky. In fact, Mervyn King cites Stabilizing an Unstable Economy in The End of Alchemy, so it is not as if he was completely unaware of Minsky’s work (!). My guess is that King only looked at the parts of Minsky’s book that discussed the “Financial Instability Hypothesis,” and ignored the sections on how Minsky wanted to reform capitalism to stabilise an unstable economy.

Monetarism, Again

Although Mervyn King does not appear to be a Monetarist, he has incorporated a hidden analytical assumption that mainstream economics picked up from Monetarism. (My comments here are based on Minsky’s observations about Monetarism.) Historically, central bankers were, well, bankers. However, Monetarists were fixated on the magical variable “M” in economic models, and insisted that the only role of the central bank was set the level of “the money supply” in some optimal fashion. Ideally, all discretion would be removed from central bank activity; everything would be rule based. (Professor John Taylor’s arguments about rule-based policy rates are just a variant of this view.)

If the central bank just buys Treasury securities, there is almost no discretion in its decision-making. (The trading desk has limited discretion, but they normally just act to keep bond prices in line with a fitted yield curve, similar to what private sector relative value strategists do.) Deciding what loans to discount, and what haircuts to apply, brings back discretion in a big way.

As a Canadian Prairie Populist (who admittedly lives about 2000 kilometres from the nearest prairie), I understand the political problems with central bankers cutting opaque deals with fat cat bankers. Nevertheless, that is how private sector finance largely works. Banks routinely have to decide which borrowers will have their loans rolled over, and which will end up being restructured (if the borrower cannot find an alternative source of financing). There are markets that are transparent – such as equity secondary market trading, and the futures market – but those markets are used for shuffling existing portfolios, not for raising finance.

Absent a total restructuring of the financial system, it is extremely difficult to avoid central bank staff from making relatively opaque decisions with respect to lender-of-last resort operations. For example, big banks could be broken up, to avoid “too big to fail” issues, and reduce the lobbying power of individual bank lobbyists. At the same time, the Savings and Loan crisis in the United States showed that a bunch of small banks can run over the same cliff in the same way as big banks, and that even relatively small banks can manage to develop strong political connections. (As discussed in Bill Black’s book, The Best Way to Rob a Bank Is to Own One. ) At the end of the day, we have to rely on the professional integrity of central bank staff, and not hope that disembodied “policy rules” can magically make all economic problems disappear.


[1] The End of Alchemy: Money, Banking and the Future of the Global Economy, Mervyn King, W.M. Norton & Company, 2016. ISBN: 978-0-393-24702-2.

[2] I have some reservations with this argument. I interpret Bagehot’s definition of “good collateral” in a “good under normal circumstances, but perhaps not during a crisis.” For example, BBB-rated industrial bonds are normally “good collateral,” but might not be viewed as such in the middle of a crisis. I would not view lending against such securities as “lending against bad collateral.” The Financial Crisis was unusual in that the financial system managed to convince itself that some extremely toxic financial structures were “money good,” but one hopes that investors will not be that gullible again for a long time. It makes no sense to ever lend against truly “bad” collateral, such as debt of firms in the middle of a restructuring.

[3] Stabilizing an Unstable Economy, Hyman P. Minsky, McGraw-Hill, 2008. ISBN: 978-0-07-159299-4. Minsky cites R.S. Sayers, Bank of England Operations (1890-1914), (London: P.S. King And Sons, 1936), a volume to which I do not have access.

[4] Found on pages 208-209 of Post-Keynesian Economics: New Foundations, Marc Lavoie, Edward Elgar Publishing Limited, 2014. ISBN 978-1-78347-582-7.

 (c) Brian Romanchuk 2016


  1. I'd probably go further towards what Warren has been proposing - an interest free overdraft at the central bank to whatever level the bank requires and fully disintermediation.

    The central bank is supposed to be regulating the quality of the bank's assets and the equity buffer. So if it is doing that job properly then the bank is 'good for the money'. So what does the central bank need to mess around with collateral at all for? The central bank should be on the hook if the bank goes insolvent, since the regulated banks are merely acting as agents for the central bank.

    Getting rid of collateral and interbank lending gets rid of a cost element in the banking process that has no effective control function whatsoever.

    1. If you lending against an asset, you suddenly have a much greater interest in understanding what that asset is. If your knowledge of what the bank is doing solely relies on believing what accountants say the value of the assets are, you are likely going to drift along, and then discover you have no idea what the banks were really doing.

    2. "If you lending against an asset, you suddenly have a much greater interest in understanding what that asset is."

      If you're lending *against the entire bank*, then you have much greater interest in understanding what that bank is up to.

      That's what Warren is on about when he suggests that the CB has to be 'in the bank' with its commercial underlings.

    3. Yes, but if you are lending against an asset, you still are mainly concerned with your counterparty. You do not want to rely on collateral values; you want the bank to pay you back regardless of what asset you have lent against. Also, the central bank is highly implicated with banks' creditworthiness as a result of the payments system.

  2. Banks that run a sound financial security system should only lend to borrowers with (1) adequate collateral; and/or (2) pricing power in the market. Minsky describes hedge positions as units with the ability to force a cash flow in its favor. These units can repay debt during a financial crisis but usually engage in layoffs, sale of assets, or other measures to control costs so debt service can receive priority.

    I think it would be good public policy to force banks to operate closer to the model of a sound financial security system, however, the history of government sponsored enterprises in the United States shows that groups without pricing power will be excluded from borrowing, such as for small businesses, student loans, and the persistently poor communities that get draw on maps with red lines indicating "do not lend here."

    Today an executive running a financial casino has an incentive to draw down pay, bonus, and stock options in good times and let others bear the casino loss in the long run. Government guarantees shift the loss to the balance sheet of the government in the long run. A well designed policy should keep the loss in the financial casino off the books of the government because a write-off in the private sector does not need to be offset by taxes or by new borrowing to keep cash flowing via government.

    1. The point of the proposal is that the central bank essentially forces banks to stick to using forms of financing that the central bank feels is acceptable. If you rely on regulations to define "sound" financing techniques, bank lobbyists will take over the process. Bank lobbyists do not have a seat on the team running the discount window at the central bank (or so one hopes).

    2. This four page pdf, Loan Loss Reserve Accounting and Bank Behavior,

      is the primary reference I use to understand the profit motive of bank executives and bank equity investors. Page 1 shows a hypothetical balance sheet and page 2 shows a hypothetical income statement. Hyman Minsky says bank managers are motivated to maximize income. This basically occurs by reducing the maturity of liabilities, by increasing the ratio of debt/equity, and increasing the ratio of loans to liquid assets. A non-bank financial intermediary could purchase loans from banks, hold a liquidity cushion, and issue debt and equity, creating a "synthetic bank." The main functional distinction between a bank and non-bank FI is that a bank can issue deposit liabilities, that non-banks clear payment via transfer of deposits, and that banks had traditional access to the central bank liquidity facility.

      If the central bank is only going to lend against securities in a crisis then banks must hold AAA debts of governments and non-banks. If demand deposits and similar short term bank liabilities (repurchase agreements) must be matched by liquid assets then banks must hold reserves plus securities equal to the level of deposits. Basel III proposes standards for liquidity coverage ratio (LCR) and net stable funding ratio (NSFR). These concepts are described in the eight page pdf:

      Neil Wilson mentions the Mosler proposal to strictly regulate bank assets and have the consolidated government (central bank and Treasury function) guarantee all bank liabilities. This could be a recipe for moral hazard based on the history of government sponsored enterprises in the United States. One example is Sallie Mae where the only "risk" in the business model was political risk because the Department of Education had an obligation to repay defaulted loans and interest payments and Sallie Mae had explicit and implicit guarantees of its liabilities. The executives in Sallie Mae only had to ensure that Congress and courts would continue to affirm the cash flow obligations of the government to take large pay packages and sell stock options in an apparently private firm which was really just an off-balance sheet branch of Treasury. So in the Mosler proposal the angels or devils are in the details and the public policy must decide whether the government will decrease its net worth to absorb a casino loss or whether private equity owners and unsecured debtors will be forced to accept a loss. If banks operate a sound financial security system there will be much less credit in society and much less aggregate demand at any given time.

    3. Not sure what your comments here have to do with the article.

      The whole point is to change operating procedures; the central bank is willing to lend against illiquid assets. In Misky's variant, this is the only way in which reserves are created, and hence it is a critical source of funding for the banking system. The central bank directs lending practices by only lending against what it views as "sound" securities.

    4. First, "animal spirits" do not drive a boom-bust economy. The profit motive, loss aversion motive, and the unstable structure of financial intermediaries drive a positive feedback loop during the bubble and a positive feedback loop during the bust. There is no need to refer to "animal spirits" to explain how rational individual behavior drives collective outcomes.

      Second, the history in the United States since the Great Depression is to promote unsound banking via fiscal and credit policy authorized by Congress. Borrowers who would not otherwise obtain financing under "sound banking" in markets are given loans under a variety of off-balance sheet government credit enhancements. The banks get such credit enhancements via federal deposit insurance schemes. These fiscal and credit policies mean the central bank cannot hope to regulate the financial system simply by refusing to lend against good collateral at the discount window.

      Third, when a financial crisis emerges in a system that encourages unsound credit formation to stimulate aggregate demand there are only two options: write-off bad debt in the market and regional government sectors; or increase government spending to offset the drop in private spending. The second option requires taxing those who have funds to transfer spending power to those who need funds to repay old debts, or it requires borrowing from those who have funds to transfer spending power to those who need funds to repay old debts. I think Minsky's idea to let the central bank lend more against collateral would be helpful for monitoring purposes but this alone does not form a coherent government financial policy in a system that perpetually seeks to stimulate the economy via "loose credit". A coherent bankruptcy and systemic bankruptcy policy is what is needed.

    5. Whether or not people considered things like asset-backed commercial paper as being "money good" was driven by what I and a lot of other people call "animal spirits." I was working in finance before, during, and after the crisis, and I would not characterise observed behaviour as "rational," other than in an extremely weak sense of the term. ("People do what looks best for their interests at the time.")

      The parts of the financial system that blew sky high during the crisis had nothing to do with U.S. government policies regarding credit availability. The crisis was global, with bad debts everywhere. The problems were almost entirely centered on types of securities created in the private sector (CDO's, etc.).

    6. I do not use "rational behavior" in the moral context in which I get to decide whose behavior is "irrational." I mean it is rational to take risk when markets are generating cash flows by taking more risk, and it is rational to reduce risk when markets are destroying cash flows by attempting to convert financial investments into "money good" instruments.

      I agree private sector securities formed the greater portion of bad debts during the crisis. Actually the invention of these synthetic bank structures appears to have originated with the federal government sponsored enterprises which would bundle loans as pools of assets and sell government insured liabilities to accelerate the availability of finance beyond the activities of commercial banks and other market sectors. Then the market sector began to bundle assets alongside the government sponsored enterprises and the commercial banks became exposed to the bad debts via credit enhancements offered in the sale of loans to off-balance sheet vehicles.

      According to a Treasury report Lessons Learned from the Privatization of Sallie Mae (SLMA), in the mid-1990s SLMA began to bundle student loans into SLABS (student loan asset backed securities). The reason SLABS have not blown up like the housing crisis is because the federal government guarantees cash flow on defaulted student loans and because Congress has made it impossible, on a statistical basis, for families to discharge federal direct, insured, or private student loans in bankruptcy. There is either a write-off in a financial crisis, allocated to those who can afford a loss, or there is an effort to save jobs and provide more cash flow to avoid the write-off. The central bank is captive to the markets and political climate unless the political system sets policy that discipline markets and empower the central bank.

  3. I’m baffled by the above first “basic principle”, that is, having “short-term financial liabilities” backed by “effective liquid assets”. That is, and as regards the “effective liquid assets”, who is going to want to borrow from a bank on the condition that the loan is wholly liquid: i.e. on the condition that the bank can have its money back whenever it wants? Would you borrow thousands for a mortgage or to buy a car in the knowledge that the bank that loaned you the money could have that money back within 48 hours? I wouldn’t.

    As the above article says, full reserve banking is a special case of the above two “basic principles”. Strikes me it’s much the best special case. That is, one element of full reserve to put it figuratively consists of banks putting wads of $100 bills in a safe and looking after them for anyone who wants that service. That’s clearly a service for which people are prepared to pay. It explains the existence of safe deposit boxes.

    1. The "effective liquid assets" includes the haircut value of "illiquid" assets. If the bank needs to raise liquidity, it can always borrow the amount of the "haircut value" from the central bank. That is, bank liability structures are assumed to be similar to now, and not demand loans.

      Full reserve banking is applying a 100% haircut. That is too conservative, and means that banks will not be competitive with the shadow banking system. There is no point having a perfectly safe formal banking system if we have to keep bailing out the shadow banks.

    2. Advocates of full reserve do not envisage two sorts of bank, formal and shadow, which operate under different rules. That makes as much sense as having one set of safety rules for large construction firms and a different set for small firms. Put another way, as Adair Turner (former head of the UK's Financial Servies Authority) put it, "If it looks like a bank and quacks like a bank, it has got to be subject to bank-like safeguards,”

      Another point that puzzles me is thus. If a bank receives $X in deposits and backs that with say stock exchange quote shares (which are fairly liquid), and assuming a 20% hair cut so as to cater for possible stock market set backs, the bank then has to buy about $1.2X worth of shares. The bank is bust almost as soon as it opens its doors for the first time, isn't it?

    3. (1) If you deliberately cripple the financial system with full reserve banking, every firm is going to act like a shadow bank. On the cover of one of my books, there's a five cent token that was issued by a hotel. If hotels can get involved in money creation, what is going to stop any large corporation with an inventive treasury officer? In other words, how many regulators do you think you would need?

      (2) It's a liquidity rule, nothing to do with equity. Look at my example. The bank had "effective" liquid assets (that is, including what it could get from discounting its loan book at the central bank) of $55; it just has to keep its short-term liabilities (deposits, short-term portion of debt) below $55, and long-term liabilities of $45. It could achieve that with $20 in equity and $25 in preferred shares/bonds.

      Something like a money market fund (unit trust) would need to be invested 100% in Treasury bills (0% haircut) in order to cover its "liabilities", which are almost all short term. That would look like a full reserve bank. Normal banks would just need equity/long-term liabilities (including preferreds) to cover the deficiency created by non-zero haircuts.

      No matter how liquid equities may appear to be, they do not have a fixed par value, and the haircut should be 100%. No one is going to mistake an equity mutual fund for a money market fund.

    4. Understanding the mechanics of implementation is the first step to understanding policy. Let's see if I understand "full reserve" policy correctly:

      The central bank would remain a fractional reserve controller. With a "full reserve" policy in place, the reserve ratio would be 50%.

      Under this policy, a private bank would calculate the required reserve by adding all deposits on account, then multiplying by 50%. The calculated reserve would be placed on account at the CB.

      Example: A private bank makes a loan equal to the original deposits on hand. This results in a doubling of deposits on record at the bank.

      Next, the private bank calculates new reserve requirements. The reserve requirement would equal the amount on original deposit. The amount-to-be-placed-on-reserve would also equal the value of the loan. The full reserve requirement would have been met.

      Do I have this right?

    5. Firstly, effective liquid assets is a calculation only looking at assets. Haircuts are only applied on assets, and thus not deposits.

      Effective short-term liabilities all come in at 100% of their value, and include demand liabilities (demand deposits) and "short-term" liabilities. For example, a 5-year bank bond would not be an "effective short-term liability" for the first four years of its life.

      Under "full reserve" banking (not the example I gave!), the haircut on everything other than Treasury bills/deposits at the central bank ("reserves") is 100%. That is, only reserves and t-bills count as "effective" liquid assets. (I will lump t-bills in with reserves in the rest of this comment.)

      All deposits and short-term debt will need to be covered by reserves. That means that a bank could only extend a loan (which creates a deposit) if it has excess reserves that matches the amount of the loan.

      Under the system advocated by King, the haircuts for non-reserve assets is generally less than 100% (although it would be for things like equity). If the haircut on a type of loan was 50% (as in my example), it would need excess "effective liquid assets" of 50% of the new loan before it makes such a loan. (50% of the new deposit is covered by the loan itself, the other 50% is covered by the previous excess.)

      A bank would normally need to run with excess liquidity coverage (since it cannot normally issue long-term debt or equity on short notice), but it could invest that excess coverage in financial assets that have reasonable haircuts. For example, long-term government bonds might have a haircut of only 10%, and AA-rated senior corporates might have a haircut of 25%. This means that the bank would not be forced to hold an uneconomic mix of assets on its balance sheet as its liquidity buffer. Under full reserve lending, it has to keep all of its liquidity buffer in reserves, since non-reserve assets will not count.

  4. I see a flaw here. The flaw is a result of banks lending money they do not own, then backing the loan with assets they, again, do not own.

    Any bank, including central banks, will make a loan by increasing the spending power of the borrower. In return, any bank, including central banks, will extract a promise from the borrower to return the spending power.

    Increased spending by the borrower can only increase the value of anything for sale, automatically increasing the perceived value of assets. So far, so good. The bank appears solvent.

    Not so good, the borrower has made a promise to repay spending power. This is a commitment to reduce the ability of the macro-economy to spend, most visible when the borrower repays his loan.

    This bubble-generating sequence underlays all banking. The consequences can be mitigated by striving for a smooth, repeated sequence of borrowing and payoff, never arriving at concentrations of either borrowing or payoff events.

    The consequences can be further mitigated by strong equity ownership by the lending banks. With strong bank equity, a defaulting borrower will only reduce the capital position of the bank itself, not depositors. (Remember, the borrowed spending power remains in the economy when a borrower defaults. The only true loss flows to the owner of the not-returned spending power.)

    A banking sector composed of many small private banks are capable of the calming influence of averaging by making many small loans with staggered payoff dates. Of course even small banks can be captured by a herd-mentality and begin to act as a single block.

    Many small private banks are also likely to be better prepared to absorb the smaller, diffuse pattern of defaulting borrowers by having true ownership of assets. Central banks are an ownership contrast because of the diffuse, completely public ownership nature of a government owned bank.

    A central bank is a block by definition. You can expect a central bank to act as herd-of-one. A strong central bank will coerce private banks into following a herd policy.

    You can see that I am somewhat suspicious of your proposal to increase central control of banking. I hope I made clear my reasoning.

    1. The United States has a fragmented banking system, while post-Confederation Canada has mainly had a concentrated banking system. (Pre-Confederation Canadian banking was unregulated mayhem.) The US has had regular banking crises, while Canada has so far avoided any major bank failures. So just on that basis, we cannot say a lot about the size of banks versus crises.

      The central bank is not making the original loan, it is only lending against existing loans. It has no commercial imperative to expand its balance sheet size, and so it is better positioned to be skeptical about borrowing trends. As I wrote, it is exceedingly likely that the central bank will be caught up in the "animal spirits" of an expansion eventually; however, it will at least have some idea what is going on, as it will be continuously evaluating the assets brought to it for discounting.

  5. Brian

    Thank you for a very interesting post. When reading Minsky, (the Minsky of Stabilising an unstable..., more than the Minsky of JM Keynes) I felt he was moving towards a statement of a political business cycle very similar to the one described by Kalecki in the 1943 essay. Just as Kalecki supplemented the Keynes Ch12 conventional opinion/animal spirits view of the business cycle with an account of the periodic need for capital to discipline labour (trumping concerns over profit maximisation), so here too, I believe, we can tell a story about changing conventional opinions on the quality of financial assets, which importantly are shared by central bankers, and also one about the political appetite to control the financial sector animals at the eligible collateral/discount window. The fact that someone as lobotomised and smug as King has come up with a suggestion that can actually be related to the history of political economy is astonishing but maybe not to be entirely unexpected. My fear is that we have quite a way to go before central bank / treasury staff have the appetite to exercise these powers in the public interest, because in the wider political discourse there is still no idea at this stage of neoliberalism what the public interest could possibly look like. In other words it still has to get worse before it can get better.


    1. In my book, I wrote that I was skeptical about the political environment. King's version is a half-way house: the central bank only gets involved during a crisis. As he himself notes, that is just a way of ratifying what the central bank is going to do (and did do) in a crisis anyway.

      I will admit that I did not read the entire book. But from what I saw, King's views were interesting. He largely toed the mainstream party line, but at the same time, he admits that mainstream macro is useless in practice.

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