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George Selgin

George Selgin



Articles by George Selgin

Reflections on the Repo-Market Imbroglio

12 days ago

While my fellow Fed-watchers have had their eyes firmly glued to the repo-market for several weeks now, I’ve been preoccupied with some other Fed monkey business: its plans to launch a new real-time retail payments service. Having recently testified before the Senate on that topic, I finally have some time to devote to add my two cents to what others have had to say about the Fed’s repo-market tribulations.
A Broken Floor
By the "repo-market imbroglio," I mean, for those of you who haven’t been watching the repo-market at all, the Fed’s struggles of late to keep short-term private-market interest rates, including both the fed funds rate and rates on private repurchase agreements (or "repos"), from rising above—if not well above—the top of its fed funds rate target range.
The basic problem

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On Targeting the Price of Gold

August 29, 2019

Thanks to President’s Trump’s picks for prospective Fed Board nominees, the subject of gold price targeting (or a gold “price rule”) is getting attention once again.
The idea, which got a lot of attention back in the 1980s, after Arthur Laffer  and other supply-siders, including Alan Reynolds, first began promoting it, is that the Fed could mimic a gold standard, keeping inflation in check and otherwise making the dollar “sound,” by employing open-market operations to stabilize the price of gold. The topic has come up again because three of Trump’s prospective nominees have at one time or another suggested that the U.S. should revive the gold standard, and two of them, Herman Cain and Stephen Moore, are full-fledged supply-siders. Although Cain and Moore are no longer in the running,

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How to Flip a Yield Curve

August 19, 2019

If the recent yield curve panic proves anything, it proves that, in financial markets, what may start out as a mere statistical correlation, and possibly a spurious one, can become a genuine causal relationship. In particular, if enough people subscribe to a post-hoc fallacy, it may not stay a fallacy for long.
A Self-Fulfilling Prophecy
It was, therefore, just a matter of time before the discovery that inverted yield curves often anticipate recessions resulted in the world’s first yield-curve induced panic. And the distance between panic to recession is no great stretch. Knowing that the curve has turned turtle, and anticipating tumbling stock markets and shrinking incomes, the public rushes to trade stocks for more liquid assets, while banks tighten lending standards. Lo and behold,

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Fed Watchers Should Keep an Eye on the IOER-SOFR Spread

July 25, 2019

Regular Alt-M readers are no doubt looking forward to the FOMC’s announcement next Wednesday. But I doubt they’ll be sitting at the edges of their seats between now and then, much less biting their fingernails.
Markets have, after all, been anticipating a modest Fed cut ever since the committee’s last meeting, when the FOMC chose not to cut just yet, but to “wait and see.” During his recent appearances before the House and Senate, Chair Powell only seemed to reinforce the general belief that “wait and see” meant “we’ll cut in July.” Finally, since the relatively dovish Jim Bullard, the lone dissenter in June, who favored a rate cut then, still thinks that a 25 basis point cut should suffice, it hardly seems likely that the Fed will cut its target by more than that amount. In short,

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Is There Such a Thing as a Free-Market Gold Standard?

July 9, 2019

Twice recently I’ve come across arguments to the effect that, despite what some libertarians, goldbugs, cryptocurrency fans, and Fed Board candidates imagine, the idea that the historical gold standard kept governments from managing money, leaving the job to market forces, is a myth.
In his June 24th piece criticizing Facebook’s Libra Currency, which is being marketed as a sort of international stablecoin, Barry Eichengreen writes:
Mercifully, Facebook avoided the idea that a stablecoin will free us from the tyranny of the Federal Reserve. Typically, stablecoin purveyors invoke a mythical past in which the monetary unit of account was free of government manipulation and backed by tangible assets, such as gold in the 19th century. But as any historian will tell you, the 19th-century

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The Fed’s Chicago Shindig

June 26, 2019

Earlier this month I was lucky enough to attend the Federal Reserve’s much-anticipated conference on “Monetary Policy Strategy, Tools, and Communication Practices.” This was the “research” component of a series of Fed Listens events kicked off this February and wrapped-up last week. The aim of the series was to allow Fed officials “to hear perspectives from representatives of business and industry, labor leaders, community and economic development officials, academics, nonprofit organization executives, and others” concerning how the Fed might more perfectly fulfill its mandate.
To call both the Chicago conference and the Fed Listens series unusual would be an understatement: traditionally, the Board of Governors tends to be a somewhat insular institution, if not one plagued by

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The Fed’s Shifting Goalposts

May 16, 2019

When I published Floored! last October, I thought I’d said all I could say concerning the adverse consequences of the Fed’s then decade-old decision to adopt a “floor”-type operating system. In the new arrangement, the Fed pays interest on bank reserves, and uses changes in the rate it pays, instead of adjustments to the available quantity of bank reserves, to regulate other interest rates. Among other things, I explain in my book, as I’ve also done to some extent here at Alt-M, that decision contributed to the U.S. economy’s deep downturn in late 2008, that it undermined banks’ incentives to monitor each other’s safety, and that it has made it more tempting for politicians to treat the Fed as a giant piggy-bank to drawn upon for their pet trillion-dollar projects.
But it turns out I

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The Nice Limits of Modern Monetary Theory

May 10, 2019

In my Twitter feed the other day, I came across a link to a website “dedicated to explaining and promoting awareness of Modern Monetary Theory.” The site is called “We CAN Have Nice Things,” and its summary of MMT seems to me to represent reasonably well how MMT is understood by many of its fans, if not by MMT experts themselves. That summary also “nicely” shows just how cavalier MMT enthusiasts can be when it comes to describing MMT’s practical policy implications — and particularly the quantity of “nice things” we can have by heeding its advice. Whether MMT experts themselves are to blame for this is a good question. Perhaps they regret that their fans keep exaggerating their theories’ policy implications. But at least some of them seem to make similarly exaggerated, or at least

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The Fed’s New Repo Plan

May 2, 2019

I’m not the gambling sort. However, were I so I’d bet dollars to donuts that the Standing Repo Facility (henceforth “SRF”) plan proposed by David Andolfatto and Jane Ihrig in a pair of St. Louis Fed articles (here and here) will be an important topic of discussion at the upcoming Chicago Fed Conference on Monetary Policy Strategy, Tools, and Communication Practices. That plan is supposed to allow the Fed to go on trimming its balance sheet for some time, instead of ending its unwind this October, despite Basel’s LCR requirements and despite the Fed’s determination to stick with its current floor system of monetary control.
Although I’d rather see the Fed switch to a corridor system, which requires hardly any excess reserves, if we’re to have a floor system I’d rather it be one that

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More on Commodity Price Targeting

April 9, 2019

In a previous post, I argued that Paul Volcker didn’t put a stop to inflation by having the Fed systematically increase interest rates when commodity prices rose, and lower them when commodity prices fell. While commodity-price targeting, aka a “price rule” for monetary policy, had some prominent proponents back in the 1980s, neither Volcker nor any other Fed chair embraced the idea.
Today’s post has to do with two things that I didn’t say in that earlier one. I didn’t say that commodity price movements played no part at all in the Fed’s decision-making. And I didn’t say whether they should or shouldn’t play any part in it. I plan here to review studies of the actual role commodity price movements have played in the Fed’s monetary policy decision-making, as well as ones that ask

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Stephen Moore’s Other Volcker Rule

March 26, 2019

Of many dubious claims that recent Federal Reserve Board nominee Stephen Moore made in a Wall Street Journal op-ed he published a couple weeks ago, perhaps the most startling was his claim that “to break the crippling inflation of the 1970s,” former Fed chair Paul Volcker linked Fed monetary policy to real-time changes in commodity prices. When commodity prices rose, Mr. Volcker saw inflation coming and increased interest rates. When commodities fell in price, he lowered rates.
Of course it’s true that, in the early 1980s (not the late 1970s), Paul Volcker’s Fed finally reigned-in the U.S. inflation rate. It’s also true that the Dodd-Frank Act’s section 619 implements a “Volcker Rule” barring banks from using customer deposits to engage in various kinds of proprietary trading. But I

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MMT’s Big Coin Gambit

March 20, 2019

Modern Monetary Theory has been accused, not always fairly, of more serious shortcomings than you can shake a stick at. Among other things, critics have faulted it for not being all that modern, for passing-off tautologies as profundities, for wrongly assuming that the value of fiat money rests upon the government’s power to levy taxes, and for misunderstanding the causes of inflation while being grotesquely overconfident in fiscal authorities’ ability to control it.
But a shortcoming of Modern Monetary theorists seems to me more irksome than any of the flaws in their theories. I mean their habit of confounding things they would like government officials to do with things those officials are both able and willing to do. They acknowledge legal constraints on public policy options,

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The Fed’s Got Problems But Deflation Isn’t One of Them

March 18, 2019

The following letter was sent to the editors of the Wall Street Journal in response to a March 13th opinion piece by Stephen Moore and Louis Woodhill entitled “The Fed is a Threat to Growth.”
To the editor, 
While we at Cato hardly qualify as apologists for the Fed, I can’t resist defending it from Stephen Moore’s sensational claim (“The Fed is a Threat to Growth,” March 14) that its “deflationary” policies have “chopped 1 to 1.5 percentage points off real growth over the past six months.” 
“Deflation,” first of all, means an absolute decline in prices, and not merely a decline in the rate at which prices increase. And notwithstanding Mr. Moore’s assertion that “the consumer-price index has been remarkably flat or slightly negative,” neither the CPI nor any other popular price index

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Bob Murphy on Free Banking in Canada

February 12, 2019

A few months after my April 2018 Soho debate with him concerning whether fractional reserve banking is damaging to an economy’s health, Bob Murphy gave a lecture on “Rothbardians vs. ‘Free Bankers’ on Fractional Reserve Banking.”
Bob devotes a substantial chunk of that lecture to elaborating upon what he considers shortcomings of my particular arguments in favor of free banking. Though he is generous enough to allow that my theoretical arguments are not quite a cinch to refute, he thinks rather less of the empirical evidence I offer in support of those arguments. In particular, he calls the evidence supporting my claim that the Scottish and the Canadian free banking systems were quite stable “very weak.”
So far as the Scottish episode is concerned, Bob’s claim rests mainly on the fact

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The Modern New Deal That’s Too Good to Be True

February 8, 2019

This morning I responded to leading Modern Monetary Theory (MMT) proponent Stephanie Kelton’s Huffington Post op-ed, “How We Can Pay for a Green New Deal,” with a tweet observing that

MMT often boils down to nothing more than an especially naive sort of Keynesianism: assume an unlimited excess supply of every resource save money balances, and, voila! monetary expansion can costlessly finance all the projects we like! https://t.co/fHi4rpp2Vh # via @HuffPost
— George Selgin (@GeorgeSelgin) February 8, 2019

My comparison of basic MMT arguments with plain-vanilla Keynesianism is hardly novel: many others have made it, less succinctly but more compellingly: I recommend, in particular, the writings of Thomas Palley — who is himself a self-described (but not at all naïve) Keynesian — on

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The Fed’s LCR Reserve Requirement: An Ace up Its Floor-System Defense Sleeve

December 20, 2018

Among many other advantages it enjoys when it comes to influencing the course of monetary reform, the Fed has that of being able to shift the constraints that determine whether a proposed reform is or isn’t possible. If existing constraints don’t stand in the way of some reform Fed officials would rather not see happen, they can always put up a new one, tailor-made for the purpose.
The Fed seems prepared to do just that as part of its campaign to keep the “floor” system of monetary control it set-up in October 2008 around for good. Considering the floor system’s many disadvantages compared to a “corridor” system, should the plan work we may all live to regret it. Those disadvantages include:
A considerable increase in the share of financial-institution intermediated credit that gets

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On Fiscally Neutral Monetary Policy

November 27, 2018

Of many interesting things said during Cato’s 36th Monetary Conference, one in particular tempted me to rush to the podium to give its author a big hug. The speaker, Joe Gagnon of the Peterson Institute, was calling into question the now-conventional wisdom that, to avoid interfering with the efficient allocation of credit or otherwise involving itself in matters best left to Congress, the Fed must stick to purchasing Treasury securities, and nothing else.
“It puzzles me,” Joe said (at 00:31:36)
why people think that the Fed should only allocate credit to the government. Why is that the obvious thing to do? …What seems to me more neutral would be [for the Fed and central banks generally to] hold the market basket of all assets, and then conduct their policy proportionately in all

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Scottish Banks and the Bank Restriction, 1797-1821, Part 3

November 13, 2018

Having considered, in two previous essays, the origins, legality, and adverse consequences of the Scottish bank suspension, we’re now ready to ask whether, and in what ways, that episode compels us to reconsider the virtues of free banking, both as practiced in Scotland and in general.
If the Scottish bankers were indeed guilty of “violating the property rights of their depositors and noteholders,” as Murray Rothbard and some others charge, does that mean that it’s not legitimate to treat the Scottish episode as an example of the advantages of freedom in banking? Does it mean that free banking on a fractional-reserve basis is inherently unsustainable?
The Bank Notes Act of 1765
To answer: yes, the Scottish suspension does suggest that in important respects the Scottish system was not

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Scottish Banks and the Bank Restriction, 1797-1821, Part 2

October 31, 2018

In my opening post about Scottish banks’ suspension of specie payments, I explained that, although the suspension was technically illegal, it failed to provoke any lawsuits in part because it was no less in the interest of many Scottish citizens, and Scottish bank creditors especially, than it was in that of Scottish bankers themselves. Rather than sue their banks, large numbers of prominent Scotsmen resolved publicly to make and receive payments in notes issued either by the Bank of England or by the Scottish banks themselves.
But while many Scots may have been willing, at least grudgingly, to accept bank notes rather than specie in payments, it doesn’t follow that none were harmed by the suspension. In today’s post I’ll consider just what the costs were, and who bore them. I’ll then

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Scottish Banks and the Bank Restriction, 1797-1821, Part 1

October 9, 2018

From the beginning, there is one embarrassing and evident fact that Professor White has to cope with: that “free” Scottish banks suspended specie payment when England did, in 1797, and, like England, maintained that suspension until 1821. Free banks are not supposed to be able to, or want to, suspend specie payment, thereby violating the property rights of their depositors and noteholders, while they themselves are permitted to continue in business and force payment upon their debtors. …White correctly notes that the suspension was illegal under Scottish law, adding that it was ‘curious’ that their actions were not challenged in court. Not so curious, if we realize that the suspension obviously had the British government’s tacit consent.
–Murray Rothbard, “The Myth of Free Banking in

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The Narrow Bank: A Follow-Up

September 14, 2018

In my last post I wrote about the lawsuit TNB USA Inc has filed against the New York Fed, which has refused to grant the would-be bank a Master Account. I argued that, despite its name (TNB stands for “The Narrow Bank”), and despite what some commentators (now including, alas, The Wall Street Journal’s editorial staff) seem to think, TNB isn’t meant to supply ordinary persons with a safer alternative to deposits at ordinary banks. Instead, TNB’s purpose is to receive deposits from non-bank financial institutions only, to allow them to take advantage, indirectly, of the Fed’s policy of paying interest on bank reserves — thereby potentially earning more than they might either by investing directly in securities or by taking advantage of the Fed’s reverse repo program, which is open to

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The Skinny on The Narrow Bank

September 10, 2018

Dedicated readers may recall my having reported here several years ago the suit filed by Colorado’s Four Corner’s Credit Union against the Kansas City Fed — after the Fed refused it a Master Account on the grounds that it planned to cater to Colorado’s marijuana-related businesses. Until then the episode was almost unique, for the Fed had scarcely ever refused a Master Account to any properly licensed depository institution. Eventually the Fed and Four Corners reached a compromise, of sorts, with the Fed agreeing to grant the credit union an account so long as it promised not to do business with the very firms it was originally intended to serve!
Well, as The Wall Street Journal’s Michael Derby reported last week, the Fed once again finds itself being sued for failing to grant a

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Fractional Reserve Banking and “Austrian” Business Cycles, Part III

August 28, 2018

In the first of this series of posts, I explained that the mere presence of fractional-reserve banks itself has little bearing on an economy’s rate of money growth, which mainly depends on the growth rate of its stock of basic (commodity or fiat) money. The one exception to this rule, I said, consists of episodes in which growth in an economy’s money stock, defined broadly to include the public’s holdings of readily-redeemable bank IOUs as well as its holdings of basic money, is due in whole or in part to a decline in bank reserve ratios
In a second post, I pointed out that, while falling bank reserve ratios might in theory be to blame for business booms, a look at some of the more notorious booms shows that they did not in fact coincide with any substantial decline in bank reserve

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Fractional Reserve Banking and “Austrian” Business Cycles, Part II

August 21, 2018

At the end of my first post in this series, I observed that assessing the claim that fractional reserve banking causes business cycles meant asking two questions: first, “To what extent have historical money-fueled booms been associated, not with growth in the supply of either commodity money or central-bank supplied bank reserves, but with declining banking system reserve ratios?” and, second, “When a banking system does manage to operate on a lower reserve ratio, does its doing so necessarily contribute to an unsustainable boom?”  I answer the first question here, leaving the second to a third and final installment.
The Myth of Bank Lending “Manias”: the 19th Century
That first question is empirical, so answering it means consulting the historical record. It happens that I did just

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Fractional Reserve Banking and “Austrian” Business Cycles, Part I

August 16, 2018

Several times on these pages (e.g., here and here), and elsewhere (e.g., here and here) I’ve tried to refute the claim, championed by certain Austrian-school economists and their many fans, that fractional-reserve banking is inherently fraudulent, because whenever the sum of readily-redeemable bank deposit balances and (when they exist) redeemable commercial banknotes exceeds the quantity of bank reserves, the difference must consist of so many fake “warehouse receipts” or “property titles.”
Although the popularity of the “fractional reserves equal fraud” (FR=F) thesis seems to be on the wane, many still remain in thrall to it, and I’m pretty darn sure that no further exertions by myself, Larry White, or anyone else will ever suffice to change all of their minds. Although I wish this

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Eppur Si Muove, or, How Not to Explain Stagnant Real Wages

July 24, 2018

Lately the old-timers here at Cato’s Center for Monetary and Financial Alternatives — which is to say, Jim Dorn and I — have been talking a lot about the Phillips Curve, which seems to be playing a part in monetary policy discussions today almost as big as the one it played in the 1970s. And you can bet that, because both Jim and I actually remember what happened in the 70s, and afterwards, neither of us has a good word to say about the concept, except as a very reduced-form means for describing very transient relationships.
Because Jim has a CMFA Policy Briefing on Phillips Curve reasoning in the works, I won’t belabor here his — and my — general objections to it. My main concern is to draw attention to a current example of that reasoning at work, in the shape of a recent New York

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The Fed’s Recent Defense of Interest on Reserves

July 13, 2018

As regular Alt-M readers know, I’ve been saying for over a year now that, despite their promise to “normalize” monetary policy, Fed officials have been determined to maintain the Fed’s post-crisis “floor” system of monetary control, in which changes to the Fed’s monetary policy stance are mainly achieved by means of adjustments to the rate of interest the Fed pays on banks’ excess reserve balances, or the IOER rate, for short.
Until recently the Fed’s intentions had to be inferred by reading between the lines of its official press releases, or by referring to personal preferences expressed by leading Fed officials. But with today’s release of the Fed’s official Monetary Policy Report by the Board of Governors, it’s no longer necessary to speculate. The section “Interest on Reserves

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Price-Level Movements, Fixed Nominal Contracts, and Debtor-Creditor Equity

July 10, 2018

Recently David Beckworth and Martin Sandbu, among others, have drawn attention to an interesting paper by James Bullard and Riccardo DiCecio unveiled in Norway earlier this year. In it, Bullard and DiCecio investigate a model economy possessing both a large private credit market and “Non-state contingent nominal contracting (NSCNC).” They conclude that, in such an economy, NGDP targeting is the “optimal monetary policy for the masses.”
Here is David Beckworth’s intuitive explanation for that finding:
The basic idea is that in a world of fixed-price nominal debt contracts (i.e. the real world), a NGDP level target provides better risk sharing among creditors and debtors against economic shocks than does a price stability target.
This is because a NGDP level target makes inflation

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The Six Trillion Dollar Chairman

July 3, 2018

As The Wall Street Journal, The New York Times, and several other news outlets reported recently, although it has managed to avoid setting off another taper tantrum like that of 2013, the Fed is having a bad case of unwind jitters, thanks to unanticipated tightening in the market for fed funds.
That tightening has manifested itself in a considerable narrowing, since the Fed began unwinding in late October 2017, of the gap between the Fed’s IOER rate and the “effective federal funds” (EFF) rate — meaning the actual rate banks have had to pay other banks, or GSEs with Fed accounts, for unsecured, overnight funds.

In effect the narrowing IOER-EFF gap means that the Fed’s recent IOER rate hikes have ended up being more potent than was expected. As a step toward addressing the problem,

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Some “Serious” Theoretical Writings That Favor NGDP Targeting

June 19, 2018

On Twitter last week Stephen Williamson wrote that he was “puzzled by the infatuation with NGDP targeting. We have good reasons to care about the path for the price level and the path for real GDP. Idea seems to be that if you smooth Py that you get optimal paths for P and y. That’s hardly obvious, and doesn’t fall out of any serious theory I’m aware of.”
I’m not exactly sure what Stephen means by a “serious theory.” But if he means coherent and thoughtful theoretical arguments by well-respected (and presumably “serious”) economists, then there are all sorts of “serious theories” out there to which he might refer, with roots tracing back to the heyday of classical economics. Indeed, until the advent of the Keynesian revolution, a stable nominal GDP ideal, or something close to it, was

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