David Laidler on Money
Sep 16 2013

David Laidler of the University of Western Ontario talks about money and monetary policy with EconTalk host Russ Roberts. Laidler sketches the monetarist approach to the Great Depression and the Great Recession. He defends the Federal Reserve's performance in the recent crisis against the critics. He argues that the Fed's monetary policies have not been unconventional nor impotent as some critics have suggested. The conversation closes with a discussion of the state of macroeconomics and monetary economics.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Greg G
Sep 16 2013 at 11:14am

Superb podcast Russ. You began with a guest who is extraordinarily articulate and who did historically important work in the field. You achieved an easy consensus about the relevant historical facts and had some healthy push and pull about what conclusions should be drawn for future policy. Even on points of disagreement you were both respectful and modest about the degree of certainty we can have about such things. Bravo.

I especially enjoyed hearing David point out some of the ways Keynes and Friedman were more alike than people think. Their differences are often overstated. I guess this is understandable given the quite bewildering variety of people who have self identified as Keynesians. It is less understandable if you tend to think of Keynesianism as, well, what Keynes said.

Friedman probably did more than anyone else in America to turn the most fundamental Keynesian ideas into the conventional wisdom. First, he fully endorsed the idea that macro level economic analysis and policy response were necessary.

Second, he endorsed the idea that it was the government’s responsibility to optimize aggregate demand. It was the absence of government action to prevent the money supply from shrinking that was the way he alleged the government caused the Great Depression. To be sure, he wanted it done through monetary policy, not fiscal policy but the goal of optimizing aggregate demand was the same.

Keynes was famously willing to change his mind in the face of new evidence. Hayek often complained about how frequently Keynes changed his mind. I think it is very likely that, had he lived to see it, Keynes would have been much influenced by the work that Friedman did.

Sep 16 2013 at 12:10pm

Quantity vs interest rate :

In normal times the Fed at its meeting

1. Looks at leading indicators of inflation.

2. If they are too high, it extinguishes some money by selling more debt; if they are too low, it creates some more money by buying back some debt.

3. Buying or selling are increased by slightly adjusting a target interest rate. This is where interest comes in. They buy or sell until the market output is the new interest rate target. The target is a Fed input, the actual interest rate is a market output, saying when the money supply has been changed that small amount.

4. At the next meeting, the go back to 1 for another small change.

One thing has has to be true is that the leading indicators of inflation used are orthogonal to the interest rate change, lest the Fed blind itself.

Today is not normal, and the Fed has more or less blinded itself to inflation by its own actions.

The chief result of pumping money into interest-paying bank reserves is to make the banks legally solvent, owing to those reserves, without blowing up the amount of money in circulation.

I think a theory of what’s going on today has to go micro, and look at the results of the abolition of the rule of law in contract and the insane costs of regulation in reducing the universe of possible businesses. Most businesses operate on the edge of going concerns, so an increase in costs blows a huge number out of the water. On the bright side, a reduction in costs brings a lot back. I don’t think the Fed can fix this.

Sep 16 2013 at 1:16pm

I concur enthusiastically with the first post. This was really a superb episode. It does make me realize though, that despite listening to your program since 2008, I still have an entirely nebulous sense of what M1, M2, M3, etc. are. How many different Ms are there? How are they defined? What are their advantages and disadvantages in different kinds of analysis? Perhaps at some point you could allocate a show to such questions.

Sep 16 2013 at 6:25pm

I’d like to hear Laidler’s perspective on the fraud leading up to the crisis, the impunity enjoyed by the banks, and the cronyism that protects the worst actors. It’s irresponsible to ignore that when discussing these issues.

Pietro Poggi-Corradini
Sep 16 2013 at 11:45pm

NGDP targeting vs. Inflation targeting for the common person.

D. Laidler: “If I tell my wife the Bank of Canada is targeting nominal GDP, she’ll just look at me and wonder what on earth I’m talking about. If I tell her they are telling her they are targeting the rate at which the cost of living goes up, she understands that.”

S. Sumner: “would you rather tell the public you are trying to boost their incomes back to prosperity levels, or that you are trying to raise their cost of living?” and “To the public, the “cost of living” is the amount of income you need to have a normal lifestyle. The public actually favors NGDP targeting, they just don’t know it.”

Shayne Cook
Sep 17 2013 at 8:21am


I’ve made the recommendation that you invite Frederic S. Mishkin for a podcast and pose several of the questions/problems you ask here to him. David Laidler was an eminently suitable substitute for now.
Well done, Russ.

Steve Sedio
Sep 17 2013 at 9:49am

How does inflation work as an indicator in a cost plus world?

When I can buy the same product from many different suppliers, often the only differentiator is price. Company A can’t raise prices without losing market share to company B. That ripples down through the food chain. The only indication that a companies manufacturing costs have increased too much to be profitable, is when they go belly up.

In that environment, when demand for a product increases, price doesn’t, because supply can easily exceed demand. Competition keeps creating the next best thing, selling with little to no price increase, just to maintain market share.

To grow, companies can sell stock based on sales. I would think raising interest rates would have had limited effect.

What am I missing?

Sep 17 2013 at 11:20am

I really enjoyed this episode; thank you, Russ and David. Many of my detailed comments would just echo Greg G, above, so I’ll not bore everyone with them. I will add that I especially liked Laidler’s ability to make a fairly technical topic accessible to a layman like myself, and that I appreciate his humility when addressing actions and opinions with which he does not agree.

Sep 17 2013 at 11:57am

Here is what inspires me David Laidler and other leaders of this “market monetarism” school:




Shawn Buell
Sep 17 2013 at 1:03pm

Something which I fail to understand which I hope a guest on a future podcast can address for me is this: When the money supply contracts, where does it go?

It seems to me that the amount of money available in the economy is subject to a one-way sort of “1st law of Thermodynamics” in that money can be created but it can’t be destroyed – at least in the sense that once either physical or digital currency is created it isn’t “destroyed” (outside of wear of physical money) – so where does it go? Especially in the case of money issued to banks through the Fed where bank assets are being purchased through Fiat currency creation.

People can’t stuff their mattresses with digital money which the fed shovels out the door. Is it disappearing into overseas accounts due to trade imbalances – is the fed recollecting these digital dollars and essentially deleting the account? (I’m sure this isn’t the case, as they’re paying interest to institutions on held reserves)

I’m very confused as to why it is of such critical importance for the fed to ensure that the money supply remains inflated – especially in situations where there isn’t offsetting value being generated in the real economy. Why shouldn’t the money supply shrink in response to contractions in the real economy?

Sep 17 2013 at 4:22pm

I’m not exactly sure how to interpret the discussion on the points about the money supply, M1, etc. However, I did come across this article on M1 as it currently stands.


more info on the definition of M2 and other historical data is here at the Fed site:


Sep 17 2013 at 8:59pm

I will credit the interviewee on his implying that unwinding this massive inflation will be extremely difficult. Obviously his opinion is different from the current Fed Chairman who is 100% certain he can unwind this mess.

I was very annoyed with this statement by the interviewee:

I wish that QE3 was perhaps a little more vigorous, because money isn’t growing quite as fast as one would like to see it; it’s stuck somewhere in the 5-10% per annum expansion range, depending on which aggregate you look at.

I wish that the growth in money supply was zero, that way my 3% increase in salary wouldn’t actually be a 2% to 8% loss. Fortunately for me I am paid more than one deviation above the average wage. Had I made the average wage, I would be much worse off materially.

Greg G
Sep 18 2013 at 7:54am


Money can really go out of existence. A great place to begin in learning about how money works is Milton Friedman’s great four page essay “The Island of Stone Money.” (You can easily find it with a Google search) That will radically expand your idea of what money is and how it can be hard to define. This is why I loved the reference Russ made to something being “moneyish.”

Every act of lending expands the money supply in a real way. The borrower views the loan as money available to spend (and has probably borrowed because he needs to spend it). And the people who receive that money as the result of the borrower’s spending certainly believe those revenues are theirs. Meanwhile the lender also views that original loan as an asset on his balance sheet. This makes him feel wealthier than he would be without that asset and that in turn causes him to spend his other money more freely. And it makes others more willing to loan to him.

Every act of loan repayment or default reverses this process effectively shrinking the money supply.

This is why the credit creation in the Shadow Banking System was able to fuel such a boom. And it is why the credit destruction of the financial crash caused such a drop in the money supply which the Fed was desperate to offset.

Physical money that could actually materially “wear out” is a small percentage of the total money supply.

Deflation tends to reduce economic growth since it forces borrowers to repay with more valuable money than they borrowed. So people are less willing to borrow to start a new business. Lenders are also less willing to lend because they can see their purchasing power grow by simple holding money without taking the risk of investing.


It is easy to understand why you “wish” you could have a 3% raise in the face of a constant money supply. That would indeed raise your personal purchasing power if you were able to wish such a thing into existence. The problem is, in the real world, the inflation rate and the raise your employer is willing to give you are not independent variables.

Shawn Buell
Sep 18 2013 at 11:17am


I’m imagining this scenario: A group of people who own capital decide to monetize that capital and form a bank in order to lend that money out and generate a consistent rate of return on their otherwise moribund capital (let’s say they own a bunch of gold bars.)

In a different place, an entrepreneur spends his capital to have a home constructed which he intends to sell. The entrepreneur’s hard assets have been converted into another hard asset – a home for sale which he can sell for more than his cost because he has added value to the raw materials.

A third party comes along and wants to buy the home from the entrepreneur. Third party approaches the bankers and applies for a mortgage. The bankers approve third party’s mortgage and transfer funds equal to the home’s sale price to the Entrepreneur in exchange for third party’s promise to repay over time.

However, third party isn’t very responsible. He allows his fire insurance to lapse and the home burns down. Obviously, third party is loathe to continue to make payments on the home (which no longer exists) to the bank and defaults.

What has happened? A real asset has been destroyed – Wood, siding, toilets and cabinetry are all incinerated, but the money which represented that value still exists. It is still in the hands of the Entrepreneur after a fashion – his initial investment in the form of purchases of materials to build the home was reimbursed by Third Party via the Bankers. He has been made whole.

The Bankers can sue Third Party over their now worthless paper, but Third Party is bankrupt and has no assets which the Bankers could seize.

So, the money, which represents real value and real things continues to exist even though the actual things which were purchased with that money are now gone – this creates an imbalance. There is relatively more money now than there are goods and services to offset the money. The bankers are also out because their entry on a ledger representing value (they had a lien on the house) is gone, making their balance sheet look worse.

The problem is, the entry on the balance sheet was always sort of an illusion. The money they lent out, which is a real thing, lent in exchange for another real thing is gone – in exchange for something imaginary or intangible. If one of the partners in the bank decided he wanted to be bought out and leave, the actual assets which the bankers could use to do so are gone – lent out to borrowers such that only a fraction of the bank’s actual assets are held in the business (leveraging). So if the partner wants out, the other bankers have to go to another bank (or the Fed!) and sell their assets in order to get liquid funds to make whole the partner. In the case of the Fed, they simply create an account, put some dollar value in it and transfer that dollar value to the bank in exchange for their paper.

This money is also illusory – but it can be used to do real things. That is, at least until people have so much money that they won’t accept it any more in exchange for real things.

The issue that I see here is that debt is ultimately the problem. The bankers FEEL wealthy because they “own” all of these assets which they can show on their balance sheet. They can take the things on their balance sheet and be made whole by the central bank who will buy their paper with numbers in accounts (perhaps at a discount rate) – which nonetheless has no real offsetting value standing behind it in the real world – and then that money is loosed into the real world via debit and credit card transactions.

There never was destruction of money involved – merely destruction of a real thing.

Shayne Cook
Sep 18 2013 at 12:09pm

To Shawn Buell:

Something very, very close to the scenario you described was the justification for implementing “mark to market” rule in financial business accounting.

The difference being, instead of the “house burned down”, the house was never actually, sustainably worth what was loaned/paid for it in the first place. Once that was “realized” in a non-esoteric sense, it had to be “realized” in an accounting sense.

Greg G
Sep 18 2013 at 3:59pm


If I am understanding your scenario correctly, the money that originated as banker’s capital wound up with the entrepreneur house builder in the end. The new money that was created by the loan was destroyed by the default on the loan as the result of the fire. The banker’s take the loss. The builder is paid and it is harder for the borrower who defaulted to borrow in the future. So far we have watched money be created and later destroyed in this scenario.

Next you ask a very good question. What happens when the Fed comes in and issues new credit to recreate the money that was destroyed? This can cause inflation and would have an inflationary effect in the scenario you described.

But in the bursting of the housing bubble most houses did not burn. They still exist albeit at a lower market value than before. The overall contraction in the economy and the many people who lost their jobs as a result of the bubble bursting had a deflationary effect that mostly offset the inflationary effect of the Fed creating all the new money.

Now it is true that money can be hard to define precisely although I don’t think that was the case in this scenario. I can’t begin to explain that part as well as Milton Friedman did in that essay so, if you haven’t read it yet, please do. You will learn far more from his writing than mine.

Debt can be a problem or the answer to a problem depending entirely on the specifics of the situation.

Shawn Buell
Sep 18 2013 at 8:01pm

I guess what I’m trying to say is that in my example what was destroyed (and this goes for the 2008 financial crisis) was a series of entries in ledgers – not actual money.

A Bank may show a large number of assets on their books, but these are non-liquid assets, consisting of a series of promises to repay. They also have cash flow which derives from these promises, which constitutes their life-blood, ability to pay overhead, salaries and show profit, but the actual money that went to make the loans is long gone.

The loans themselves have no intrinsic value outside of monthly payments and what they can conceivably market those promises-to-pay to another institution with real assets to trade them for.

So large groups of these promises to repay were bundled together into “Collateralized Debt Obligations” (CDOs) which claimed to have value that the banks could pass on to other financial institutions which was actually far in excess of their actual future value, due to the fact that the collateral for the loans (homes) couldn’t be sold for an ever-increasing amount to another buyer in the future at some point.

The homes weren’t burned – but their value collapsed because their owners couldn’t find a “greater fool” than themselves next in line to pay off their obligations, and the structure of the loans made holding on to the asset impractical for the average bubble homebuyer.

So the financial institutions which held these instruments last (in a perverse, musical chairs style situation) ended up taking a massive hit to the book value of their assets – note that no money was actually destroyed – only the illusion of value provided by accounting entries.

Thus did these financial institutions cry out to the central bank: “Make us whole, for we have foolishly been caught holding the hot potato!” and the Fed responded by purchasing every asset in sight for grossly inflated prices, releasing trillions of dollars of virtual money into the banking system – QE infinity.

Every meaningful measure of inflation which we know has reflected this reality. It’s especially visible on commodities where we can’t cheat by simply printing more – such as imported petroleum, cars and other consumer goods such as food where the price is denominated in dollars. Those prices have shot up, reflecting the reality that internationally, the expectation is that there is going to be a lot more American Dollars chasing the same amount of goods than were available previously.

No money was destroyed. Money was only created – in this situation, it’s a ratchet.

So, again I ask of Russ or anybody who can answer this: can he explain where this money goes when they say the money supply contracted? Is this just another way of saying that the value of ledgers decreased? People can’t stuff their mattresses with Digital Money, and the money which I’m hearing about as being of interest to economists in regard to predicting oncoming recessions or depressions doesn’t seem to be money at all – it seems to be accounting entries which take a dive.

Sep 18 2013 at 8:28pm

@Shawn, money is just a ticket in line to say what the economy does next, presumably something for you.

The fed issues tickets so that there aren’t so many that people bid up prices on what the economy is capable of doing at once, or so few so that the production is only half attended.

It destroys tickets by selling debt and burning the tickets it takes in. It creates tickets by buying back debt with newly printed tickets.

If you stuff a ticket in your mattress, the Fed notices that there are too few tickets and issues another one until such time as you dig it out and spend it, when the Fed takes back its ticket and burns it.

Money isn’t wealth. It just looks like it to an individual. When you add up the wealth of a nation, though, you don’t count the money.

Michael Byrnes
Sep 18 2013 at 8:39pm

Shawn Buell wrote:

“I guess what I’m trying to say is that in my example what was destroyed (and this goes for the 2008 financial crisis) was a series of entries in ledgers – not actual money.”

You are absolutely correct that a series of entries in ledgers was destroyed in the crisis… but those entries were “actual money”.

In all likelihood, the entrepreneur in your example received electronic money, i.e. ledger entries.

A big part of the purpose of financial intermediation at the banking level is to issue money – liquid liabilities – against illiquid assets.

Banks are constrained in their ability to issue money by their reserve requirements and their stock of (usually illiquid) assets.

Nick Rowe just did a great blog post on the topic of money and banking:


This, of course, is quite different from credit defaults swaps, CDOs, etc. That was basically the whole financial sector engaging in, as Russ Roberts has said, “Gambling with other people’s money.”

Greg G
Sep 18 2013 at 9:52pm


The distinction you want to make between “actual money” and some other kind of money won’t hold up. Money is anything that is very widely accepted as payment for goods and services. Even if you think it shouldn’t be. It’s entirely conventional. Are you sure “money ” is the term you want to use here?

Todd Kreider
Sep 19 2013 at 4:00am

Really fun to listen to. For me, one of the best this year.

Shayne Cook
Sep 19 2013 at 5:37am

Shawn Buell:

Good question. A complete answer to your question is beyond the scope of a comment here, but I think I can provide a partial clarification that may help.

“the money supply contracted” is a misleading phrase. It would be more complete, accurate and understandable in the context of your question to say, “the supply of money made available for lending (at risk) to the private economy contracted.”

The only real thing that has “contracted” is the willingness of folks who actually own money to exchange that money for a “claim on assets”, where the value of those assets are, shall we say, nebulous.

I suspect that clarification will inspire quite a few more questions.

paul vreymans
Sep 19 2013 at 5:54am

It is surprising that 5 years into the crisis, and with no end in sight, many (including the interviewee) still believe in the effectiveness of the FED’s monetary policy.

All the tricks of the Keynesian and monetartist textbooks have now been tried and pushed to the edge: years of zero interest rates, a quadrupled monetary base and expectations fooled by bogus statistics.

Five years of “monetary stimulus” have solved none of the problems (that were caused by loose monetary policy in the first place): growth remains weak, unemployment remains high, (public) debt keeps rising, derivatives continue to accumulate, banks remain fragile, and lenders are more reluctant to lend ever. Five years of “quantitative easing” brought us on the brink of a global currency war.

The reality is that interest rate suppression causes more problems than it can ever solve. The lower yields fall, the more people and banks tend to hoard and the more aggregate demand falls. The more the money supply expands the more money velocity declines.

The empirical evidence that “Monetary stimulus” is a myth under the link below:


Michael Byrnes
Sep 19 2013 at 8:33am

Shayne Cook wrote:

“It would be more complete, accurate and understandable in the context of your question to say, “the supply of money made available for lending (at risk) to the private economy contracted.”

The only real thing that has “contracted” is the willingness of folks who actually own money to exchange that money for a “claim on assets”, where the value of those assets are, shall we say, nebulous.”

I may be misunderstanding you, but I don’t think this is correct.

Most of what we call “money” is bank liabilities – promises by the bank to pay $X on demand. If you have $5,000 in a checking account, all you really have is the bank’s promise to give you $5,000 in base money (i.e. currency). If you were to ask for the cash and the bank doesn’t have it on hand, it would have to sell assets for cash, or borrow it from another bank or the Fed. The promise would only be as good as the bank’s assets and reserves, except that deposit insurance (and the Fed as lender of last resort) also agree to make good on the promise.

But most of these promises to pay cash on demand are simply traded between banks. My employer’s bank transfers promises to my bank, and then I transfer the promises from my bank to my mortgage bank, the banks used by my electric, gas, and cable companies, and the banks used by my credit card companies. Even though I could demand my entire paycheck in cash, in practice I demand less than 5% of it.

The promises have value because they are backed by the bank’s assets (i.e. loans – promises by others to pay the bank)and the FDIC, and because most everyone chooses to accept them in payment for various goods and services.

If banks lose assets (such as by making bad loans), the money supply contracts, as they avoid making promises they can’t keep. (Of course, things like deposit insurance and central banks can lead smaller banks to create too much money (i.e. may too many promises).

Greg G
Sep 19 2013 at 9:32am


I would not want to say, as Shayne does that, “The only real thing that has “contracted” is the willingness of folks who actually own money to exchange that money for a “claim on assets”, where the value of those assets are, shall we say, nebulous.”

Now it is certainly true that did contract dramatically and was ground zero for the contraction. But as the effects rippled out, a lot of individuals and households reacted to their lower incomes and lowered net worth by reducing their spending on a wide variety of goods and services.

The velocity with which money travels around the economy has a lot to do with what the effective money supply is. Think of it this way: If everyone was rich but everyone totally stopped spending money what would happen? The effect on economic activity would be the same as if no one had any money.

In the real world, the velocity of money changes all the time and the Fed tries to adjust to that as rhhardin points out above.

Shayne Cook
Sep 19 2013 at 11:03am

@ Greg G.:

Notwithstanding your obvious empathy for the plight of the unemployed, your statement, “But as the effects rippled out, a lot of individuals and households reacted to their lower incomes and lowered net worth by reducing their spending on a wide variety of goods and services.” is NOT supported by facts.

See U.S. Bureau of Economic Analysis (bea.gov) GDP Table 1.1.5. You will quickly note that annual (C)onsumption spending increased during the period of 2008-Now, both in nominal dollar terms, and as a percentage of GDP. What declined (contracted) during that same period of time was (I)nvestment spending – an historically large component of which is housing.

To Shawn and Greg G.:
Anna Schwartz has a marvelous explanation of the mechanics of why and how this happened in her “Money Supply” paper, linked at the top of this page.

Shayne Cook
Sep 19 2013 at 12:48pm

Michael Byrnes:

You’ve almost got it, but you are laboring under a common misconception – that it’s the “bank’s” money.

It is not now, nor ever was, the bank’s money or the “bank’s capital” (as stated by Greg G. above) to any more than a trivial extent. It was, in fact, the triviality of the extent of bank owners’ money and bank owners’ “capital” at risk that precipitated the financial crisis.

It is extremely helpful to keep in mind that “banks” serve, almost exclusively, an agency function. That is all. They are NOT (by and large) the owners of the money that is lent to borrowers. Furthermore, their agency is on behalf of lenders/creditors, whether they be called “savers”, “depositors”, “money-market investors”, or “bondholders”.

Greg G
Sep 19 2013 at 1:19pm


I don’t doubt that consumption spending has increased between the peak of the crisis in 2008 and now. My point was that consumption dropped from a pre-crisis peak in 2007 before it began to rise again. Certainly we agree that the bulk of the contraction was in the value of financial assets.

You are quite right that today little of the money that banks loan out is their own capital. However, the scenario that Shawn asked about was one where he specified that it WAS the bank’s capital. He described it as follows:

“I’m imagining this scenario: A group of people who own capital decide to monetize that capital and form a bank in order to lend that money out and generate a consistent rate of return on their otherwise moribund capital (let’s say they own a bunch of gold bars.)”

Shayne Cook
Sep 19 2013 at 4:06pm

@ Greg G.:

2007 was not a “peak” in consumption spending. Consumption spending INCREASED from 2007 “peak” (as you call it) in both nominal dollar terms AND in percentage of GDP terms in 2008 and every year subsequent. This is NOT my assertion – it is the U.S. Bureau of Economic Analysis GDP data.

In Shawn’s scenario, the “owned capital” to start the hypothetical bank is equity. Once they loaned out their equity, they are no longer a bank – they no longer have any money available to lend if they only use their equity to lend. All they have done is convert one asset class (gold) to another (a bond or other debt instrument). That is not a bank.

Banks don’t do that – just lend the extent of equity and then close the doors. In the case of “commercial banks”, they take on depositor’s money (liabilities) and lend that as well. In the case of an “investment bank” the equity position is used as collateral to borrow (typically from money markets) and re-lend. Again, banks provide an agency function only, on behalf of those who have money to lend, and to the benefit of those who wish to borrow.

Recall that the “owners” of Bear-Stearns, Lehman, et.al. had very little of their own money – their equity – at stake prior to the collapse. Far, far, far, too little, as a matter of fact. Actual “leverage ratios” – the ratio between the money they had borrowed against a combination of paltry equity PLUS “marked to market” debt instrument asset value – were in excess of 40 to 1.

Point being, it never was, isn’t now, and never will be the “banks money”, or more correctly, the bank owners’ money. Banking is an agency function.

Shawn Buell
Sep 19 2013 at 4:43pm

My example was intentionally simplified for the sake of avoiding this: The bank opens its doors and accepts deposits from people and conducts normal financial transactions on the behalf of those people while offering them safe harbor for their money and a nominal interest rate on deposits. In exchange, the bank is able to concentrate the aggregate deposits of thousands of individuals into loans which the bank derives cash-flow from in order to cover operating expenses, interest to depositors and profit.

I suppose in this scenario the bankers lack the appropriate “skin in the game” to prudently lend money, and thus might make risky or speculative loans which they stand to gain a great deal from while risking somebody else’s deposits and having no downside.

In my example I was simply trying to speculate about how a group of people who own some form of stored value (let’s say gold) might decide that sitting on non-growing, non-liquid capital might liquidate that capital (perhaps they sold the gold on the commodity market) in order to generate a corpus of cash which they can use to make loans, and how that cash could then pass from their hands and value (in the real world) can be destroyed, but the money which was exchanged remains. It isn’t similarly burned if the house burns down.

The money can only be lent out once. So, when I talk about the illusion of value, what I mean is that the bank may hold a lien on third party’s home which it values at $100,000 (what it lent out for the purchase) – but that value is just a number in a book. What the bank actually receives from the home owner is a series of level payments of $1,000/mo. Unless the homeowner sells the home and pays off the remaining principle on the note, all that the bank can expect is their series of payments over a certain number of months, which stops at some point in the future and the lien is released.

Whether the bank shows the value of the home as being $100,000 or $50,000 on its books is largely irrelevant – the homeowner has agreed to provide principle and interest payments to the bank for x years no matter what the accounting value of the asset is in the present or future.

The cash flow that the bank generates from the accounting entry is what they ought to be concentrating on.

This is why the current crisis boggles my mind: in my own neighborhood after I moved in (I purchased a foreclosed home which was vacant for 18 mo.) there were multiple homes whose occupants were frankly, in over their heads. This is because the mortgages that they had were unaffordable for a variety of reasons, be they job losses, balloon payments or other problems. The fact that many of these homes sat vacant after their owners abandoned them for a not inconsiderable period of time, during which time the bank was garnering no cash flow, but stubbornly maintained the book value of the asset seems to me to have been suicidal.

If the banks had simply conceded that they had screwed up by making these loans in the first place and that their position was untenable, they could have made reasonable modification offers to the owners of these homes. They could have done this in order to maintain a portion of their cash flow rather than getting nothing.

In the end, they got the worst of all worlds – they had to take write-downs on the value of their portfolio AND they had to suffer being cash-poor and unable to cover their liabilities when mortgagees defaulted.

I understand that there is a form of moral hazard which would have been encouraged here – but the original, greater moral hazard was already stalking the land once bankers and writers of financial derivatives understood that they would be made whole by the government no matter what bad-credit borrowers did.

Sep 19 2013 at 5:53pm

@Greg G
With a constant money supply I would be better off with a zero increase in salary which would be a zero loss in purchasing power versus the current situation where my 3% increase is actually a 2% to 8% loss.

Greg G
Sep 19 2013 at 7:09pm


One of the unforeseen consequences of securitization was that it made it nearly impossible to do the kind of reasonable loan modifications that could have salvaged many of these loans back in the day when they were held in one place by one owner.

Most investors did not buy these bonds because they were confident they would be bailed out. Most bought them because they were (wrongly) convinced they wouldn’t need to be bailed out in the first place.

Shawn Buell
Sep 19 2013 at 8:07pm

@Greg – the rational thing for the holders of those bonds to do would have been to realize that they had one of 2 options: Accept a default on the payments or take a haircut on the valuation of their bonds.

In the end, they really amount to the same thing, but in the latter case they get to continue receiving payments instead of the zilch they received in the situation of default.

Greg G
Sep 19 2013 at 8:26pm

No Shawn. First of all, with a securitized bond there are lots of different owners for each mortgage. It’s hard to locate them all, much less get them all to agree on modification terms. If you do find them all they still won’t agree.

Not all the mortgages will default so the investors who bought the safest tranches will usually not agree to a reduction because it would mean they get less than they would get by blocking the modification and letting the lower tranches take a total loss.

Sep 19 2013 at 10:46pm

Best podcast in a long time. Kudos on getting an academic to say “moneyishness”

Nicholas Georgako
Sep 20 2013 at 5:25pm

Fabulous interviewee, and correct to the last iota.

As for those who insist the Fed has created inflation, like Shawn, he answered it completely. To get inflation we need excited spending and we haven’t got it. If and when spending gets excited, the Fed will have to try to reel it in with higher rates and scarcity of money. Read up on the consequences of deflation, which is what you advocate. In deflation people do not even invest because the money under their mattress will increase in value and the real interest rate, even if trivial, is far too high for growth.

Going back to the bailouts, what do you maximize? The propriety of long term incentives or peoples’ living standards? If the former, let Lehman and the money market funds fail and enjoy another great depression.

Michael Byrnes
Sep 20 2013 at 10:14pm

Excellent comment, Nicholas.

Many forget that inflation doesn’t happen by any sort of magic.

Inflation has to happen at the micro level – no seller in his right mind will raise prices to a level that customers are not willing to pay. (Any who try will suffer the financial consequences.)

Overly loose monetary policy certainly can drive inflation, but it still has to happen at the micro level, as sellers perceive increased demand for their products and raise prices in response (as they should in such a situation).

Since the crisis has tended to reduce economic activity, inflation has been muted.

Nicholas wrote:

“Going back to the bailouts, what do you maximize? The propriety of long term incentives or peoples’ living standards? If the former, let Lehman and the money market funds fail and enjoy another great depression.”

This is why I personally like the idea of nominal GDP targeting. If the level of nominal spending is maintained (or restored), then we don’t need to bail anyone out.

Ralph Soule
Sep 20 2013 at 10:17pm

I don’t get much out of podcast like this. Over an hour of conversation about how many economists can dance on the head of a pin and debates that only seem to matter to economists (not that I have anything against economists per se). Economists cannot seem to agree on what caused the Great Depression or how big the fiscal stimulus should have been so how can that be considered science? The only line I thought redeeming was Dr. Roberts’ frequent admonishing to pay less attention to economists and their theories because they know less and less about more and more of the economy or words to that effect. I guess, as a professor of economics, Dr. Roberts has to include topics like this on a podcast titled “econtalk,” but it would be nice to post a disclaimer “warning, this is stuff important only to economists” so I can move on to other podcasts.

Frederick Davies
Sep 22 2013 at 1:45pm

Good interviewee; should come more often.


David Laidler
Sep 24 2013 at 9:57am

Correcting an error: during my conversation with Russ, I made a factual error in saying that there was no limited liability in British Banking when Bagehot wrote Lombard Street (1873). Although such arrangements did not became the norm until after 1879, a minority of banks were already limited liability companies by 1870. I don’t think this error affected the substance of any of my arguments, but that is no excuse for having made it, and I apologise. An excellent source of information on all this is Acheson, Hickson and Turner (2010) “Does limited liability matter? evidence from 19th century British Banking Review of Law and Economics”, 6 pp.247-273

Sep 24 2013 at 8:56pm

Thanks for an excellent podcast, David.

Sep 25 2013 at 7:57am

@Michael Byrnes

“Inflation has to happen at the micro level”

I think you confuse a rise in the price of a specific product compared to others with inflation. In other words, you confuse a change in relative prices with inflation. Have you ever heard of Say’s law?

Sep 27 2013 at 6:26am

No, I am not talking about changes in relative prices.

The “price level” is an aggregation of the change in individual prices paid in all markets. It is a useful concept because its inverse (1/price level) equals the value of a dollar. Since a dollar can be used in virtually all markets, and a dollar has no price of its own, the price level is a useful estimate.

For the “price level” to change, buyers (for example, consumers and employers) need to, on net, be willing to pay more for whatever they are buying. A merchant cannot say “the Fed just debased the dollar by 5% so I am going to mark up my prices by 5%”. Ultimately, the merchant needs to respond to sales. If raising his prices means sales plummet, he can’t do it and remain in business. Same for the labor market.

Changes in relative prices do not necessarily affect the price level. If, for whatever reason, a people, on net, start to prefer pears to apples, the price of pears will rise, that of pears will fall, and – if those prices adjust to market clearing levels – the price level will be the same. The excess demand for pears is offset by the reduced demand for apples.

Sep 29 2013 at 8:49pm

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Podcast Episode Highlights
0:33Intro. [Recording date: August 26, 2013.] Russ: So, I want to start with the Great Depression and Friedman and Schwartz's work. They had very revolutionary views of what caused the Depression and the failure of the economy to recover. What did they try to teach us in that book? Guest: Well, let's first remember that that book was from 1867-1960. It wasn't just about the Great Depression. What they tried to teach us about the Great Depression specifically was that it was a particularly extreme example of a pattern that you could see throughout American monetary history, namely that if you allowed the rate of money growth to collapse, you were going to bring about a downturn in the economy. More specifically, as far as the Depression was concerned, they argued that the Federal Reserve System turned a fairly routine downturn that started in 1929 into an absolute catastrophe by first of all failing to act to support the banking system in the first year of the downturn, and then just failing to take vigorous action to get the monetary system expanding again over the next two years. Culminating in the Bank Holiday of 1933 and the raising of the price of gold and all the rest of it. So, in a nutshell, the message was: the Great Depression was not a sign that there was some deep flaw in the market economy. It was the Fed's fault. Russ: And how have those arguments held up in the current crisis that we're in, sometimes called the Great Recession? Guest: Well, it depends on who you talk to. If you talk to Paul Krugman or read his blog, he's been very insistent that those arguments have been blown out of the water by the last recession. He argues that this time around the Fed did indeed react quickly and vigorously, and basically nothing happened. I think he's just wrong about that. One of the things that didn't happen-- Russ: Why? Guest: Well, one of the things that didn't happen this time is that the money supply didn't contract by about 30% in the wake of the financial market crisis. The price level didn't fall the way it did in the early 1930s. The inflation rate went down to about 0% but it stabilized. And though the first year of both crises in terms of contraction in national income and the impact on the labor market looked very alike, at the end of the first year things stabilized this time around rather than spiraling on down for another couple of years. So I think this time around we got pretty much what Friedman and Schwartz's analysis would have led us to expect. Now, that's not to say that the Fed couldn't have done better this time around. I think in hindsight people like me could argue they could have been even more expansionary. But that's another story. And of course there's another part of the story: that you had fiscal stimulus as well this time around, which you very much didn't have in the 1930s. So there's always an issue of sorting out just how much to attribute to monetary policy, how much to attribute to fiscal policy--all those old debates that have been going on since the 1930s, on and off. Russ: Let me just ask you one question about that. Hoover gets blamed for being a do-nothing president. But government spending did rise during the Hoover Administration, correct? Guest: Yeah, no, Hoover got a very bad rap. He really did. People forget that Hoover, when he was Secretary of Commerce, was a big supporter of the National Bureau of Economic Research's data collection and business cycle analysis programs. And Hoover's aim was actually to put in place a system in which the Federal government and the United States could deploy countercyclical fiscal policy. And indeed, when the Depression first came, that was what he wanted to do. The trouble was, the collapse was so prodigiously fast that what was available for the Fed to do was just, by no means, big enough. But the Friedman and Schwartz argument is then relevant here: basically the rather puny fiscal efforts that Hoover was trying to make were just undermined by the incompetence of the Federal Reserve System.
5:37Russ: So, coming back to the Krugman criticism--and he's not alone, of course. Many people have argued that because of the lower bound of 0 on nominal interest rates, that the Fed is impotent: that it can't really do anything. You've argued that they've actually been somewhat effective; they could have been more effective, but they forestalled a disaster. What's your view on this issue of the so-called 'liquidity trap'--the idea that the Fed can't really affect any monetary policy as interest rates get as low as they have? Guest: Let's just get one thing in the history of economic analysis straight. This is not really an argument about a liquidity trap, that Krugman and people are putting in the traditional Keynes sense. It's an argument about what Ralph Hawtry in the 1920s and 1930s called a 'credit deadlock'--a state of affairs in which the business sector was so depressed that it just wouldn't borrow from the banking system. And because it wouldn't borrow, credit didn't expand; and because credit didn't expand, the money supply didn't expand. Now, Hawtry and other people in the 1930s were arguing: well, when that happens, the Federal Reserve System has got to be proactive; it's got to go out there and buy securities, buy long-term government debt, buy anything that's there and just stuff the banking system full of reserves until it starts lending actively on its own account. And I would argue that policies like that have been available this time, but the 0 lower bound is a problem for conventional everyday monetary policy that focuses on the overnight rate. But it's not an insuperable barrier to monetary policy when an economy is getting into trouble. It's just something you've got to take account of and you've got to do other things. And I do wish people wouldn't call these policies 'unconventional,' because they are not. They've been in the economics literature for nearly 100 years. Russ: Do you think Friedman would have been an advocate of quantitative easing (QE) along those lines? Guest: Well, I want to be careful here. Because Friedman is not with us. And a guy that imaginative, you're never quite sure what he would have said this time around. I think what we can say is that his analysis of the Great Depression and his analysis of Japanese issues--you know in the 1990s, roundabout the year 2000, 2001, he certainly was in favor of what we now call quantitative easing in those cases. I'd like to think he'd be in favor of it this time around, but I say you have to be careful. A striking feature of the recent debate was for example that the late Anna Schwartz, early on in this recession, was actually very critical of the Fed. That surprised me; but she was. So you can't count on these things. Russ: We're going to come back to the criticisms of the Fed from monetarists, which has been very interesting. Right now we're talking about the criticisms of the Fed from the people who are more advocating fiscal stimulus. But my question is that, you are suggesting that the 0-lower bound is not so relevant because the Fed can go out and buy assets and inject money directly into the banking system; that the interest rate issue is not so important. But how do you reconcile that, given that you give the Fed decent marks, with the fact that so many reserves have piled up in the banking system? And there seems to be so little expansion of credit? Guest: Well, first of all, since 2011 roughly speaking, money growth has picked up in the United States. Let me refer to another monetarist economist, Phillip Cagan, who did a lot of the background work for the Monetary History of the United States. The way he put it was this: When people look to the United States after 1933, many people argue that the Fed was expanding the reserve base; the money supply was growing a little bit more; but all of this was like pushing on a limp string. It still didn't get the economy going. And what Phil Cagan said was: really not so. The right analogy is pushing on a coiled spring. And you start pushing, and first of all the spring starts to compress and nothing much happens. But as you keep on pushing harder and harder and for longer and longer, eventually the other end of it begins to move. And I think we've been seeing that happening in the United States this time around. It's been remarkably consistent with the later 1930s, I think. I wish that QE3 was perhaps a little more vigorous, because money isn't growing quite as fast as one would like to see it; it's stuck somewhere in the 5-10% per annum expansion range, depending on which aggregate you look at. And I think the economy could stand a bit more of that. But things are now moving in the right direction. There is a recovery underway. It's not all that vigorous, but all the signs are the economy is coming around; and it's doing that in the face of some fiscal contraction, as well. Which I think is quite striking. Russ: Now, on this program in the past Steve Hanke has argued that using broader-based measures of money, other than M1 and M2, that growth remains well below its trend. The growth of the money supply. And that despite the expansionary aspect of the Fed, it hasn't offset the contractionary aspect of the shadow banking system's collapse and the regulation of that system that's contracted the supply. What are your thoughts on that? Guest: Well, I think--I'm not an expert on the day-to-day workings of the U.S. monetary system right now, but I think there's probably something to that. And I think it's probably consistent with my own judgment that the conventional aggregates--you know, M2 is not all that narrow, after all. There's quite a lot of assets in there. That that could be more vigorous without putting anything very much at risk. I know Steve Hanke likes those things called 'divisia aggregates.' Russ: Yeah; that's what he uses. Guest: Yeah, he uses Divisia M4. Now a divisia aggregate is one in which you weight the rate of growth of the particular component by its liquidity. So if it's a very liquid asset, you give it a bigger weight. Russ: It's more 'moneyish.' Guest: Right, more moneyish. And you measure its degree of moneyishness by the difference between the rate of return that's paid on that asset and some representative market rate of interest. Now all those spreads have narrowed. And what the divisia aggregates are showing is the rate of growth of, shall we say, M1--demand deposits, transactions money--is not getting the amount of weight in those broader aggregates as it usually does, because the difference between the 0 rate of return on that kind of bank liability and overall market rates of interest has shrunk. My general take on monetary aggregates is that there's no reason to suppose that one aggregate is going to tell you the story all the time, under every historical circumstance. You need to keep an eye on a range of monetary aggregates. And if they start telling you different stories depending which one you are looking at, then the next step is to go into the data and try to find out why. I don't think there are mechanical rules here to apply to policy. I wouldn't want to argue this. That's a long answer to a short question. I wouldn't want to argue with Steve Hanke about this. He's closer to the data than I am, and as far as I can see, what he's saying is consistent with what I've been saying. Russ: And that's just a way of explaining the slowness of the recovery relative to the depth of the shock. Guest: That's right. I've certainly been surprised at the amount of quantitative easing that the Fed has had to carry out to get the monetary system moving again. And, as I say, I'd like to see it moving even faster; but I'm not sitting in the policy chair wondering how I'm going to unwind all this eventually when the economy comes around. I don't think that's the problem for next year. I think we've got a way to go yet. Russ: That's a rare moment of honesty, even from an EconTalk guest. I appreciate that.
14:24Russ: I want to go to a question that I've asked many times to different guests, and I appreciate my listeners' patience. But I think you actually have a lot of insight into this question relative to some of the people I ask. And that's the following. I was trained, as you were, at the U. of Chicago, and I was taught that when you think about monetary policy, you think about quantities. You think about the quantity of money. Now, you might debate or be unsure as you alluded to as to which definition, which aggregate measure is the right one. But we were told to look at quantities. If you want to understand the impact on the nominal economy, if you want to look at the impact of monetary policy on inflation, you look at money. The quantity of money. And yet, over the last 10, 15, 20 years, the Chairs of the Fed, plus many monetary economists, always talk about interest rates. What's going on there? Why are there two different approaches? Help me understand that. Guest: Well, what I think happened was that people like me, in the 1970s and 1980s, overstated the case for the reliability of the rate of growth of the money supply as the anchor for monetary policy. Things didn't work out as well as expected in a number of places. You also have Milton Friedman's really catastrophically bad call at the end of the Volker disinflation, that double-digit inflation was just around the corner again. And central banks were put off relying on money growth. And I think they threw the baby out with the bathwater. I think money growth targeting wasn't very effective for a policy framework; but I don't think that was a good reason to stop looking at these variables altogether. But a lot of people did. And parallel to that, of course, you had developments in monetary theory, starting in the 1980s, 1990s. Big names there, people like John Taylor and Michael Woodford, Lars Svensson, who started building models of monetary policy in which they simply cut out the financial system altogether and just concentrated on direct links between policy interest rates and the level of spending in the economy. And that kind of model works just fine when the monetary system is functioning. When the monetary system is functioning you can ignore it. And I'm afraid we had about 15 years when leading scholars of monetary economics just cut the monetary and financial system out of their analysis. And that's been a shame. I hope that one beneficial side effect of the last few dreadful years is that people will start paying attention to those monetary aggregates again. Just as a side remark: In Europe, the European Central Bank had a reference value for the rate of growth of M3 as sort of backup to its regular policy-making framework. And for reasons that are quite beyond me, this reference value disappeared altogether in the last 3 or 4 years. Money growth has been incredibly sluggish in the EU (European Union); and look at the stagnation in that economy. I don't think that's an accident. Russ: Is there a parallel in the U.S. economy? I remember after I interviewed Milton in 2006, I questioned him about one of his claims about the Great Moderation--which we were of course at the tail end of at the time; we didn't realize it. It was one of the thrills of my life that a 90-plus-year-old economist--I think Milton was 92 at that point--sent me a spreadsheet and he said, Oh, you don't want to look at M1; you want to look at M2. And M2 was very, very steady, as he had essentially claimed. But it hasn't really--has M2 reflected this crisis that we are in? Guest: My recollection is that it did indeed. That its growth rate really went into a bit of a spin after the collapse of Lehman Brothers. But that in the last little while it's got back again. Yeah, I've just got this up on my computer screen just to check, and M2 at the end of 2008 was actually growing for a little while close to 10%, it just peaked; and then it went into a spin and almost got down--its growth rate--to 0%, by early 2010. And then the growth rate has been coming back since. So, what you don't find in the U.S. monetary aggregate data is any sign that there was going to be a major downturn starting in 2008. There's no big contraction in money growth before the downturn started. That's one of the mysteries about this particular episode. But once it got going, you got this spiraling downwards. And, as I say, this time around, unlike the 1930s, the Fed's expansionary reaction to that put a stop to the contraction before it gathered too much momentum. Russ: Well, obviously there's a cause and effect issue in monetary policy, especially when it's linked to a financial crisis. And as you point out-- Guest: Well, that's right. The process is a recursive one. Monetary policy causes the economy to contract; and a contracting economy, if you don't watch it, starts making the money supply contract even further. That's what was going on there. Russ: And I would say especially if it originates in the financial sector. There's some debate--you allude to it in your writing--about what I would call the 'real side' or the microeconomics side. And you point out that the Austrian view, the idea that both the 1929 collapse and the current mess did see a very rapid run-up on asset prices that suddenly collapsed; and that obviously caused some challenges for the financial sector. Guest: Yeah. I mean, that's right. People keep calling these things 'financial crises'. They are really asset market crises. And they happen on the margin between markets for financial assets and markets for real assets. Like real estate and factories and physical investment. I don't think the monetarist story of the onset of the Great Depression by the way, or the monetarist story about the onset of this Great Recession, is quite plausible enough. I can't find anything in the data in the 1920s or the data in the run-up to this event, that shows a degree of sort of conventional tightening of money growth that can account for the speed of the subsequent downturn. That really looks like, in both cases, an economy where something was going badly wrong in real asset markets, and it just needed a little bit of tap from the financial markets to set a downward spiral going. And, you're right--the Austrians were the pioneers of this kind of analysis, in the 1920s even; and of course there are still Austrians around. And if I may sort of put in a plug for Cambridge, England, where John Maynard Keynes was, Keynes's colleague, Sir Dennis Robertson was developing a parallel analysis to this in the 1920s. And he wrote a little textbook; and its 1928 edition has got a couple of paragraphs expressing his fears about what was likely to happen in the United States if that asset market boom kept on going. And this was before the Great Depression and before the stock market crash. In contrast, the representative of monetarism in the United States in the 1920s was probably Irving Fisher; and Irving Fisher didn't see anything coming. He was just concentrating on the behavior of the price level and saying all is well, right down to October 1929. And indeed afterwards. So, I think we've got to give the Austrians and Dennis Robertson some credit. And I'd like to see our profession start taking that analysis a little bit more seriously. I mean the mainstream of our profession; because of course the people who have been propounding it are certainly professionals themselves. But they are in a minority.
23:13Russ: Yeah. I think the biggest challenge--you refer to it in one of your working papers, a very nice paper--you refer to monetarism without money, meaning this focus on interest rates. And I would phrase that a little bit differently, which you alluded to a minute ago, which is: Macroeconomics without the financial sector seems to be not a good idea. But the division of labor is limited by the extent of the market. And as economists have gotten more successful and there are more of us, we've specialized a lot. It seems to me now that economics needs to integrated that a little more successfully. Guest: Oh, I think that's right. Let me give you a sort of quick take on what I think happened. We talk about a market economy, and we talk about markets determining prices and allocating resources and all the rest of it. And if we go to the world we live in, what we see is, when we look and see how markets actually function, it's: we exchange goods and services against money or in credit transactions, and money passing from hand to hand, credit transactions among agents are absolutely fundamental to the way in which the markets work. Fair enough. But we can't model the monetary and financial system every time we try to address an economic problem about the effectiveness, shall we say, about tax policy or the desirability of a free trade deal with some other country. So we abstract from it, and we talk about the market functioning. Now, that kind of analysis, that microeconomic analysis, has been enormously successful, and one of the big movements in macroeconomics in the last 30 years has been to use that kind of microeconomics as a basis for macroeconomics. Well, my take on that has always been, is that abstracting from the monetary and financial system is all very well for many problems, but not for the problems of the macroeconomy. And you've seen a lot of people trying to put monetary and financial factors back into this kind of model of the market economy, not realizing that it's already in those models. A tacit assumption that the monetary and financial systems are functioning all very well, thank you. So they are trying to put the monetary and financial system into the same model twice, with different assumptions about the way it works. And it comes out as a bit of a mess. And I think that's where we've been. Russ: Before I move on, do you want to say anything about the decision by the Fed to pay interest on reserves? Why you think they did that and if it has any significance? Guest: Gee. If I remember, Milton was in favor of paying interest on reserves way back in the 1950s with his program for monetary stability. Russ: What was the argument he made for it? Guest: The argument was that if you paid interest on reserves you would give the banking system less incentive to try to evade the reserve requirements, and hence you would give the Fed more control over the behavior of the monetary aggregates. That was the essence of Milton's argument. The other argument for it that became very popular in the 1970s, up here in Canada at least, is that forcing banks to hold non-interest-bearing reserves was putting a tax on banks; and there was no particular reason for taxing those institutions. So, pay them interest on reserves and relieve them of that tax. The way we went in Canada was the opposite direction: we just phased out reserve requirements and essentially we've got a monetary control mechanism that no longer relies on the reserve base. But that's a different story, and it's not a story that's 100% relevant to the way things work in the States. I'm sorry--I haven't really given a straight answer to your question. Russ: Well, let me ask it a different way. Guest: I haven't lost any sleep about the Fed paying interest on reserves; I really haven't. But I do notice that it makes the banks more willing to hold the proceeds of quantitative easing without getting out into the market and making loans, and I wonder if the Fed noticed, paid quite as much attention to that side effect as it deserved. But that's a technical detail in the execution of policy, and takes us back to: Has policy been expansionary enough?
27:43Russ: But it's a nice segue to the next topic, really, which is some of the criticism of the Fed that have been coming not from the fiscal side but from monetarists. I'm going to read a quote from a working paper of yours, talking about criticisms of the Fed:
that it has exceeded the bounds of its responsibilities as lender of last resort by rescuing insolvent investment banks and insurance companies rather than limiting itself to providing liquidity to solvent commercial banks; that by co-operating with the Treasury in many of these activities it has surrendered its policy making independence, and that the massive increase in its cash liabilities that has resulted from these policies and subsequent quantitative easing, carries with it a serious inflationary threat.
So, why don't we take these one at a time. Guest: And be clear: I was trying to paraphrase people I was disagreeing with. Russ: I understand. This is not your view. But I thought it was a fabulous summary of what many people have accused the Fed of. You are going to defend the Fed against most, if not all, of these charges. Let's start with this one of, traditionally--goes back to, I suppose, Bagehot, who said that the Fed should be the lender of last resort, but only solvent banks; it shouldn't be propping up insolvent banks. And yet the Fed seems to have propped up everybody, once Lehman Brothers failed. Guest: Well, first of all, Bagehot didn't say that. Okay? If you comb Lombard Street on your computer and look for the word 'solvent', you are only going to find it in one place; and he's talking about Britain being solvent in a case of a balance of payments crisis. So Bagehot really didn't say that. He said some things about you probably don't want to bail out really badly run institutions. But he thought that that was a minor problem. I think something that people have forgotten about these principles of the lender of last resort that we inherited from the 19th century--when Bagehot wrote Lombard Street, there was no limited liability in banking. Okay? The banks were partnerships or they were joint stock companies, but there was unlimited liability on their owners. So the notion of an insolvent bank in 1873 was a very different thing to a notion of an insolvent bank now. Okay? Russ: That's a good point. Guest: It's a family business; the family has to be broke before the institution is insolvent. Russ: But it doesn't change--and I appreciate what you wrote; you wrote that the world changes and Lombard Street doesn't exist any more, so we need to be thinking about this in a different way. And I certainly accept that, the logic of that. The problem is, the way I understand Bagehot--whether I'm right about it, and I apologize if I'm misrepresenting him about the solvency issue. But basically, the thing that was appealing about that is you don't want to be the lender of last resort to every bank, because if you are, there is a terrible moral hazard problem. That banks will have an incentive to misbehave; their creditors, more importantly, will have an incentive to lend imprudently. And it seems to me we've gone down a very dangerous road. But you are more sanguine. What's your optimism? Guest: Well, it is a dangerous road. But the whole, that's because the financial system is a dangerous place when a crisis is beginning. The first issue is: Can you really tell the difference between a solvent institution and one that's just lacking in liquidity when there is a run on it. Northern Rock, for example, the first example in British history for heaven knows how long, over a century, of an institution that had customers lining up outside the doors to get their cash. Now, as far as I can tell, Northern Rock had a pretty good, solid portfolio of mortgages. There was nothing the matter with the mortgages it was holding. Its problem was that its supply of lending in the commercial paper market had just dried up, as part of the worldwide commercial paper market collapse. And it was a classic issue of an institution being short of liquidity. But the Bank of England sat on its hands, just for a little while; allowed this run to develop. And by the time they got everything settled with Northern Rock, the financial crisis had taken its toll; the economy had turned down; and what had started out as a liquidity problem for that institution did indeed turn into a solvency problem. But you can make a cogent argument that the reason it did turn into a solvency problem was that the liquidity problem wasn't handled early enough. A similar thing where an argument can be made about the case of the Bank of the United States in 1930 in New York--that the Fed let that one go broke. And yet they paid a pretty good proportion of their debts when the bankruptcy was finally settled in, I think, 1932 or 1933. It's not clear that they were insolvent. They might have been illiquid. But the point is, it's difficult to tell the difference, and I would rather err on the side of making sure the financial system doesn't start to seize up. So, I'm not too keen on a strict interpretation of that solvency, the liquidity-solvency thing. I would rather err on the expansionary side, to keep the system moving. Russ: Well, I take your point. Guest: I mean, a lot of people would disagree with me. I don't think it's the kind of thing that you can lay hard and fast rules down about. Similarly whether you should stick only to banks. Well, there are two arguments about what the lender of last resort should be doing. The first is the traditional monetarist one. The real object of the exercise is to stop the money supply from contracting. So, keep the institutions whose liabilities make up the money supply in business. There's another argument that says what's really important is the market for short term interbank credit, because that's what oils the wheels of commerce and keeps industry going; and you've got to make sure that those markets don't get disrupted. That's the kind of argument that's associated with Ben Bernanke's work. But if you actually go back to the 19th century literature, you'll find both of these arguments around, even in the 19th century. And the second argument, the Bernanke-style argument in particular, which by the way was also partly Bagehot's, that's an argument that says you don't want to be too strict in drawing the line between what's an institution that's the kind of institution that you are going to rescue and what's the kind of institution you've got no business going near. Once again, if the collapse of a merchant bank, or the collapse of an insurance company, is going to impinge on the ability of the commercial banks to function, it's the job of a lender of last resort to make sure that doesn't happen. And again, there's a lot of precedence for this. The Baring Crisis of 1890 in London evolved because Baring Brothers, who weren't a commercial bank--they were a merchant bank--were marketing Argentinian bonds in London. And they got caught with big inventory of Argentinian bonds that they couldn't sell. And the Bank of England essentially organized a bailout of Baring Brothers by getting their creditors to hold off calling in their debts until the episode was over. It was a little bit like the way the Fed handled the Long Term Capital Management. Russ: Yep, the same thing. Guest: There was an eerie similarity. And that's lender-of-last-resort activity, but it's not the traditional lend-freely only to solvent banks in order only to stop the money supply collapsing. So, there's a lot of precedence for these things.
35:53Russ: So, reminding myself, or warning, our reminder earlier that we're not sitting in the policy chair; we're just having a nice chat on a late summer afternoon: It does seem that that viewpoint, which I totally understand from a policy-maker's perspective--you know, err on the side of caution, make sure that you don't let the banking system collapse. Once we're in that world, which I would argue is the world we've lived in for the last 25 or 30 years, we've created a situation where the large creditors of large financial institutions know that they are part of a complicated, tangled system. Now, we could debate whether that is the result of policy mistakes, or policy decisions, or whether it's just some natural progression of technology and globalization. Doesn't matter. That's the world we live in. In that world, the presumption is: Intervene. The presumption is: Lend. The presumption is: Rescue. The presumption is: Bailout. We're in a world where that sector of the economy is effectively being highly subsidized by this inevitable decision. It seems like a very unhealthy political economy. Guest: Well, I think you've said two things about it. First of all, to the extent that the monetary and financial system are public goods as well as made up of a lot of private-sector institutions there is a sort of traditional case for the provision of public goods with subsidies that comes out of welfare economics. I don't want to make too much of that. But I think one has got to distinguish among who actually gets bailed out in these operations. If financial institutions make dumb loan and look like collapsing, I'm 100% in favor of their shareholders losing all their equity and I'm 100% in favor of the managers who made those mistakes being flung out on their ear. And if it turns out there's been fraud involved, being prosecuted and put in prison. What I would like to do is keep the network of credit markets functioning and stop the money supply collapsing. And I would have thought it was possible in a rough and ready sort of way at least to devise a policy that does that. I mean, an awful lot of people lost an awful lot of equity by holding stock in the wrong banks in the United States. Russ: But they're the wrong people to look at. They are the people who rolled the dice, diversified, a lot of them made a killing along the way; some got out in time, some didn't. It's the creditors, the fixed income folks, who worry about the solvency of the institution, not the equity people. The equity people don't want to be wiped out obviously. But you get the upside. The creditors don't get the upside. If you take away the downside risk for them, the loss of bankruptcy and a haircut, potentially 100% haircut, we've got it seems to me a very unstable system. An unhealthy system. And you alluded to the fact that in the old days, banks were partnerships and we've moved away from that. And I argue that's because we've subsidized moving away from it. Guest: Yah, but you surely can devise means of keeping the institutions functioning while having some of their bondholders take some fairly sizeable haircuts, and stop the entire financial system from collapsing. Look, I'm not arguing that moral hazard isn't a problem. What I'm arguing is that when a financial crisis gets going these things happen so fast, policy makers have to make decisions; I would just as soon they erred on the easy side. But I recognize the moral hazard issue. And I don't have a straight answer to it. I recall Charles Goodhart in England saying, some time in early 2009, that moral hazard is something we worry about next year; for the moment we have to keep the financial system functioning. And there is a lot to that. Russ: Yeah; it's the road to hell, too, if you are not careful. Right? Guest: I take it--I've heard the argument made and I don't have a straight answer to it. Somebody had to be allowed to collapse and it may as well have been Lehman Brothers. Russ: I think you said the right thing when you said there is a way to design a system that keeps some of the incentives. But for some reason--I think we know the reason, political reasons-- Guest: Yeah, yeah-- Russ: it doesn't seem to happen. I'm not so much disagreeing with you as the tendency we have as economists to advocate what we think is the best policy, neglecting the fact that the way we want it implemented and the way it actually gets implemented is not the same thing. Guest: That's fair enough. That's a fair enough point. I won't pretend to have a straight answer to it, because I don't. I really don't.
40:47Russ: Let's go to the second part of your response to the critics of the Fed's behavior, which is to me incredibly interesting, especially given the history of monetary policy. Many monetarists, Allan Meltzer being one who I've interviewed on this program who has said exactly what you were criticizing, have said that this Fed policy of massive quantitative easing, the enormous buildup in high-powered money on the balance sheet of the Fed, is going to cause huge inflation. It's going to be very disastrous. We know inflation is a terrible virus once it starts to spread. And yet nothing has happened. They've been forced to argue--and I'm one of those people; I'm not an expert, don't pretend to be one, but I still thought it was going to happen--we've been forced to say: Well, it's coming; it's just a matter of time. What are your thoughts on that? Guest: Well, first of all, I really don't understand particularly why Allan has paid so much attention to the behavior of the monetary base and so little to the behavior of the money supply during this episode. If we go back to Friedman and Schwartz and the story of the early 1930s, between 1930 and 1933, the monetary base actually expanded. Not very much--about 2 or 3% per annum was the average rate of expansion. The money supply collapsed by about a third, and the economy collapsed. Now that to me is devastatingly powerful evidence that what matters is the money supply and not the monetary base. This time around we've had this huge expansion of the monetary base, and believe me, nobody's been looking more closely at the behavior of the money supply more closely than I have to see when that was coming through. And beginning to register an inflationary threat. But here we are, what--4, 5 years later, and it hasn't happened yet. Well, the people saying it's going to happen eventually: Yeah, maybe it is going to happen eventually. If I may just deviate for a moment, my first senior colleague in monetary economics, my first job, was Hyman Minsky. In 1963 he was explaining to me that our financial crisis was just around the corner. And eventually Hyman Minsky was right. But it was 50 years later, almost. Yeah, they'll be right eventually. But I've asked Allan, and I don't think I've really had a very good answer: Why are you paying so much attention to the monetary base and why have you been paying so little attention to the behavior of the money supply this time around? And he tells me that the monetary base is the policy instrument; policy is our measure; it's extremely expansionary, and policies like that have always led to inflation eventually in the past. Well, maybe he'll be right eventually, but I see no sign of it yet. Russ: Yah. When I asked him--and this was a few years ago and it still hasn't happened yet, but when I asked him at the time, his argument was that when the economy started to recover, those reserves that the banks are holding at the Fed would start to go out into the economy, and there would be terrible pressure on the Fed to let that happen at high levels, because the economy would be recovering. It would be very difficult to tighten at a time when the economy is finally starting to recover. And it hasn't quite worked that way. The recovery has been so mediocre, there hasn't been this sudden, exhilarating whoosh of money and confidence. Guest: No, there hasn't. These are exactly the worries that the Fed had in 1937, when it doubled reserve requirements. There were lots of free reserves building up in the system, and the Fed was very nervous that it was going to lose control of the money supply. There was an expansion going on; they doubled reserve requirements and what happened was that the banks that were subject to those reserve requirements immediately built up a stock of reserves again. That contributed to a downturn in the money supply, and that downturn in the money supply contributed to the recession of 1937-1938. So, I think there have been precedents for this kind of behavior in the past. And I'm glad the Fed hasn't followed Allan's advice this time around. And I'm frankly a little bit nervous even now about the sort of rumbling about beginning to phase out QE3. I hope they don't do it prematurely, because we've been there before in the late 1930s.
45:31Russ: What about John Taylor's arguments. He's been very critical of Bernanke. He's very critical of Greenspan in the run-up to the crisis--although that was ex post criticism: he was in the Administration at the time of those decisions and maybe was not so eager or comfortable being critical at the time. But certainly ex post he's been very critical of Greenspan and Bernanke. What do you think of those criticisms and the idea of a monetary rule that would be interest-rate based? Guest: Well, two things. First of all, I mean, I was critical of the Fed in those years as well. I thought the Fed should have raised interest rates a little bit faster in 2005, 2006. We did have an upward blip of interest rates here in Canada, which was separate from anything that happened in the States. And I think that just put a damper on the economy in the nick of time. And I wish the Fed had done that. And I did actually say so at the time, not that anyone would take any notice. So I think there's something to John Taylor's argument there. It boiled down to whether in the States you took the indicator of inflation as being the behavior of the Consumer Price Index or you looked at something more esoteric, like the Core Personal Expenditure Deflator (CPCE). And the Fed were looking at the CPCE, and that of course, because it's a core index, it takes out the behavior of food and energy prices. And it missed a fairly significant uptick in inflation in fact, as a result. So I think there's something to John Taylor's argument about the Fed not having been careful enough in the run-up to this crisis. But that having been said, I still think you've got to look at something more deep going on in asset markets to explain the severity of the downturn. Russ: So, you think it's much more than just a monetary phenomenon. Guest: Yeah, I do. I never thought I would live to say this, but on this particular instance, I'm inclined to line up with the Austrians. I think they really have a point about this issue, about asset market distortions. After long periods of monetary stability. Russ: This again puts you in a small group of economists who have learned something from the crisis. Most economists--I find it remarkable how many people have managed to keep their theological views unchanged by this experience. Guest: Well you must remember that I'm retired, so I don't have to worry about pleasing journal editors any more. Russ: Yeah. Well, no comment. What would be your view on, going forward, would be the ideal monetary policy? Should we be doing something like the Taylor rule? Do you think anything positive about Scott Sumner's approach and that of others who argue for nominal GDP targeting? Milton at one point--he changed sometimes, but he argued for a steady growth rate in the rate of money. Where do you think we are right now? Guest: Let me back up. Let's think about a state of affairs in which we are out of the aftermath of the recession. So, two or three years more down the path. I still am pretty happy with the inflation rate as the target of policy. I base this a lot on Canadian experience. We've been targeting the inflation rate since 1991; we've done it pretty successfully. We didn't have a big asset market crisis here. We had not had a recession until 2008 since 1991. So inflation targeting worked pretty well for us. And it worked I think because it was a very explicit policy target agreed between the government and the Bank of Canada. It wasn't an informal thing, as it was in the Fed. It was discussed continually. And as time passed, the targets were hit and it gained in credibility. So I would see no reason to go from that to a nominal GDP target. I don't like nominal GDP as a target for policy, for the simple reason is: that's a variable that's measured with a lag and it's subject to a lot of revision. And I don't see how you can run forward-looking monetary policy targeting the behavior of a variable that you don't get a good reading on for 18 months after it's happened. With inflation targeting based on a Consumer Price Index, you get timely data and it's not subject to revision. The indices are not perfect, but they are well understood by policy makers and the general public understands them as well. If I tell my wife the Bank of Canada is targeting nominal GDP, she'll just look at me and wonder what on earth I'm talking about. If I tell her they are telling her they are targeting the rate at which the cost of living goes up, she understands that. And knowing that there is that target out there affects the behavior of ordinary consumers and producers, not just financial markets. Russ: Yeah, I think that's very important. Guest: So I'm a big fan of, first of all, the target of policy should stay the inflation rate. Now, in the 1990s we developed this kind of policy model that John Taylor made huge contributions to, in which the central bank used this control of the overnight rate, the Federal Funds rate in the U.S. context, to target the inflation rate. So long as the economy was running along fairly smoothly, that kind of model worked. I think we got the Great Moderation, as it was called, out of that kind of policy, and I don't think you can take that kind of achievement away from people like John Taylor. But the trouble with that policy regime, if you think of it as a complete regime in and of itself, is that it's for fair weather. It's a policy that works so long as the economy is running smoothly, and the shocks that come along are fairly small. But it's really bad for the kind of stormy weather that we've had in the last 3 or 4 years. The 0-lower-bound problem for interest rates is a big manifestation for that in that particular literature. These guys really didn't know what to do about it, and now they've started talking about unconventional policies. So I think there is a role for a secondary policy regime, as well, if you like, that goes back to Friedman and doesn't have a rigid target for the rate of the money supply but monitors the rates of growth of the monetary aggregates. So long as it's not telling you anything different from the conventional analysis, well, you just get on with it. But when it does occasionally start giving you different information, you go behind the numbers and ask why, and maybe modify your policy stands, if the monetary aggregates are telling you, giving you some extra information that isn't there in the interest rate based model. This is messy and it's eclectic, but I don't think we can do much better in the current circumstances, quite honestly.
53:00Russ: Now you mentioned the Canadian experience. My impression is that not only did you not have a recession between 1991 and 2008, but your 2008 experience was not nearly as drastic as the American one. Is that correct? Guest: That is correct. We did not have a big asset market crisis in Canada. We largely imported that recession from the rest of the world. Russ: And isn't it also true that in the Great Depression the Canadian economy did better than the average economy? Guest: I don't have those numbers right in front of me but the Canadian economy didn't do very well in the 1930s, I know that. What is true is that there weren't any bank failures in Canada during the Great Depression, though we had all the agricultural problems and we had all the backwash from collapsing export markets and things like that as well. So that's not an experience I would want to repeat. Russ: No, but the bank failure part of it--you'd think Americans would look and say, hey, here's an economy, rather close--next to us; they treat their banks differently than we treat our banks; their banking system seems dramatically more stable. Stability is a good thing. We don't seem to copy you guys. Guest: Well, we've got 5 big banks and a few more smaller ones. Russ: That's what we have. Our 5 are just bigger than yours. Guest: Well, you are finally catching up with us. These guys have got a long tradition of nationwide branching. They are quite tightly regulated. I don't know what more to say. In part Canada escaped this time around because we got a bit lucky. We did have a problem in the commercial paper market in 2007. But our mortgage market was much more controlled and regulated than the U.S. mortgage market. In fact, the government was in the process of deregulating the mortgage market in the run-up to the Great Recession. It's just that the deregulation hadn't got far enough to do serious damage. And spent the last 2 or 3 years re-regulating the mortgage market and putting things back where they were in about 2004. So I think we got a bit lucky. We also, I think, had some banks with good managers who--I remember hearing about the 'ninja mortgage' from a senior economist in one of our big commercial banks, again, before the crisis; and he explained to me what a ninja mortgage was, and I said: Well, I hope you are not going to buy any of those. And he said: You bet not. Well, lots of other financial institutions south of the border did, but by and large our banks stayed out of that market. So, a combination of good luck, good management. Canadian banking's got a 200-300 year history. I don't think you can export 200 years of the history of institutional development just like that. We didn't have Andrew Jackson as President, you know? Russ: That's true. But I do see it as a public choice problem more than a paying-attention problem. I think if your realtors and home builders were as powerful as ours, maybe you'd have the government subsidizing home ownership as perilously as we have. And I think that's a huge part of the problem. Guest: Well, our government does subsidize home ownership of course through a mortgage insurance program. And the mortgage insurance program was pretty tightly regulated. And they began to deregulate it. I think if the United States had taken another 18 months to turn down, we might have been following with a big collapse in the mortgage market. But it just hadn't got going. The problems hadn't developed far enough.
57:02Russ: Let's close and talk about Keynes. When you were in graduate school, Keynes was on the rise. Keynesianism was the dominant view. And you played a role, the role you played with that book, The Monetary History of the United States--you were part of that counterrevolution that Friedman and Schwartz led along with others you mentioned. Phillip Cagan; of course there were many others. In a way it started back with Irving Fisher, who was opposing Keynes before Keynes came along. But there became during the beginnings of your professional career a different view of the macroeconomy, of the business cycle. And monetarism became much more important, which was so dormant; nobody paid any attention to it 5-10 years before that. We are talking about the late 1930s, 1940s, and 1950s. So, starting in the 1960s with Friedman's work--he was certainly at the vanguard of it--in the late 1950s and then the 1960s and 1970s Friedman launched, with the help of others, a counterrevolution. What has happened since then? It's a rather remarkable seeming to me resurgence of the Keynesian viewpoint. What are your reflections on that and what do you think has happened? Guest: First of all, just to go back to my own intellectual origins, it's pretty important to remember I did the history of economic thought both as an undergraduate and as a graduate student. So, I have, for example, Lionel Robbins, who insisted that I read Henry Thornton's Paper Credit; and I'd read Bagehot's Lombard Street. I had read some of the literature of the 1920s as an undergraduate and a graduate student. So I wasn't ever in a position to be persuaded that everybody had been talking nonsense before Keynes came along. Maybe I had an unusual education. Russ: He wasn't the first macroeconomist. Guest: No; but I also read the Tract on Monetary Reform, you know, which Milton said was his favorite book by Keynes. That's the quantity theory book that deals with post-WWI monetary problems. In a very monetarist framework, by the way. So I knew that Keynes was one of these agile minds. And I don't know where he ended up. I know that his book How to Pay for the War was again very much in a monetarist tradition. He switched from his analysis of the world as always in depression to--a flexible mind--he said: Now we have to worry again about the economics of scarcity and how to allocate scarce resources in order to finance the war effort. And actually, Keynes's work on that was one of the roots of Milton Friedman's monetary economics. Friedman himself didn't know that. Friedman, when he was a young man, became aware of the 1941 British budget and its analysis of the inflationary gap and how to deal with that; and he didn't realize that was Keynes's budget. But he picked up that analysis and brought it into American debate through his articles on the inflationary gap and things like that. Okay, I've sort of made a big detour from the second part of your question. Russ: But fascinating. Keep going. Guest: I think what's happened in the interim, is that the monetarist counterrevolution never got really brought to fruition. What happened was that Bob Lucas and co. came in with rational expectations modeling. This was really a wonderful source of research topics for graduate students, and the whole profession went running with it and began to forget the kind of institutionally-based empiricism that went along with Friedman and Schwartz, in particular. It's remarkable that the most influential work of the monetarist counterrevolution wasn't a work of economic theory. It wasn't a work of high-powered econometrics. It was a work of narrative economic history that dealt with the evolution of institutions and their interaction with economic experience. Well, all that went out of the board with this fancy rational expectations modeling. Which had its benefits. But monetarism faded into the background. Now, by the time we got down to 5 or 6 years ago, we had a framework called 'dynamic stochastic general equilibrium analysis.' Which is the basis of all those John Taylor style policy models which central banks use, which literally was not capable of encompassing financial crisis within its intellectual framework. Bob Lucas himself said this in 2003--we've got some really good models but this is a residual--'residue of its use' was his phrase--they can't deal with. Like the Great Depression and financial crises. Well, we've had to deal with those things. And some people, like Paul Krugman, who were unreconstructed Keynesians, noticed it was time for a rematch between their very old-fashioned brand of macroeconomics and another old-fashioned brand of macroeconomics called monetarism. And they've been leading that debate. And I'm not quite sure where the up-to-date mathematical guys are at the moment. I think they are desperately trying to integrate financial markets into those models and catch up. So the whole state of macroeconomics at the moment is very, very fluid indeed. Russ: You are very honest about it. I think a lot of people I've read say: This fits; I don't have to change anything. Some of those folks have Nobel Prizes. I find that-- Guest: What I really find depressing is the way some of these guys--you must have heard the phrase--that they are introducing 'financial frictions' into the models. And this seems to me to be just bizarre. Just listen to what they are saying: We have a model of a smoothly functioning economy which we thought was adequate and it turns out not to be quite adequate--oh, there's a financial market and that introduces frictions into the economy. Well, that's bizarre. What's the financial and monetary system for? It's to overcome the frictions that are inherent economic life, that actually it's there to make a market economy possible in the first place. So these guys have still I think got things upside down. Which doesn't mean they aren't going to produce models that won't be useful. I've been surprised often enough in that respect.