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Modern Monetary Theory - Wrap-up
This is the wrap-up of a critique of some of the thoughts expressed by Warren Mosler in his booklet "Seven Deadly Innocent Frauds of Economic Policy"
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Mosler's Part 2 recounts his career in banking, which among other things points out the extreme degree of regulatory control that banking has had in the United States, including mandatory fixed interest rates and loan subsidies, e.g. GNMA securities being "fully guaranteed by the U.S. government, so there was no default risk" (p. 75-76). The subsequent story (e.g. at p. 84) makes it clear the GNMA securities was the majority of his career, which maybe contributes to the problems in the "frauds" part of this paper.
It's interesting also the mention of Long Term Capital Management (p.77), the investment firm that went belly up but was bailed out through interventions by the government. This was not the first such bail out (Continental Illinois was bailed out in 1984), nor the last, of course (all those in the last couple years being so notable, but also including the 1994 Mexico bailout and that of the S&L fiasco). These are great examples of moral hazard, and show how risk taking in the form of gambling with other people's money has been rewarded by U.S. government policy. In contrast, laissez-faire capitalism is a system of profit and loss, and shielding people from the latter does nothing to promote the long term health of the economy and the betterment of our society.
The effect of privatizing gains and socializing losses has been a travesty - the beneficiaries of the bailouts have been the huge banking interests that made those risky loans in the first place. All this also exposes the fallacy that the recent financial problems are a consequence of free markets; the banking industry is one of the most heavily regulated in the nation (along with health care).
Beyond that I can't say much for the trading history that Mosler relates; he describes a business at which he was evidently somewhat successful, but the cases he describes are not illuminating to the underlying nature of economics.
Mosler's Part 3 makes specific recommendations, but I don't see much point to commenting on them since I think his diagnosis of the problem has significant errors.
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Penultimately, as an alternative set of fallacies worth considering, I offer this essay on the Great Depression (also Higgs).
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Finally, let it be clear that the current recession is a tragedy of immense proportion. Unemployment at 15% (or as high as 22%), alone as a consequence, tells us we should pay close attention to the nature of this situation and try to determine the root causes. My critique of the Modern Monetary Theory as expressed by Warren Mosler in his booklet is an attempt at shedding light on those root causes; it aims to avoid making the situation even worse, by pointing out the errors in the logic that has caused the repeated boom/bust cycle, and that has insultingly been used to justify the financial bailout of powerful special interests. To be clear, many of these errors are not unique to MMT, but pervade the broad discussion of economic policy.
In the process of this writing, I have also tried to describe what I believe to be the path to sustainable growth that is based on people's freely chosen desires, with competition and risk-taking being hallmarks to satisfy the future unmet needs of the people in our society. In as much as we approach that end, the result is called laissez-faire.
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For more of this discussion, see the following posts concerning the other frauds