Nathan Tankus on the Future of MMT and How to Avoid U.S. Debt Default

With the debt ceiling deadline fast approaching, there are a number of creative solutions the government could consider to avoid macroeconomic disaster.

Nathan Tankus is a popular writer for a newsletter titled, *Notes on the Crises* and is the research director of the Modern Money Network. Nathan is also a returning guest to Macro Musings, and he rejoins the podcast to talk about modern monetary theory and the debt ceiling. Specifically, David and Nathan discuss the future of MMT, the case for minting the trillion dollar coin, the prospects of issuing Federal Reserve securities, the history of the Fed’s operating procedures, and a lot more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Nathan, welcome back to the show.

Nathan Tankus: It's great to be here. It's always good to be on Macro Musings.

Beckworth: Yes, and it's good to have you on. And as you have noted to me many times, were James Tobin, James Meade still alive today, they might be drinking from a nominal GDP targeting mug as well.

Tankus: Absolutely.

Beckworth: Because they were Keynesians who advocated that framework. But we're not here to talk about nominal GDP targeting today. We're here to talk about you and some really interesting pieces you've written recently. And also, I understand that you have a book that's going to be coming out in the near future.

Tankus: Well, it's not my book is coming out in the near future, I finally finished my book proposal and the book is in the process of being auctioned off. Now, we are recording April 7th, and so at some point at the end of the month, beginning of May, I will announce that I'm under contract with some trade press publisher. So I can't say too much about it while this process is going on. But I can say that the book is called, Picking Losers and it's about the Federal Reserve. And then it's more generally about the false idea that the Federal Reserve can avoid picking winners and losers, and how that false idea emerged… in my arguments, emerged in the late '40s, in the early '50s around the Federal Reserve Treasury Accord of 1951, how it came to prominence over subsequent decades, and then came to prominence and then global dominance in the late '80s, '90s and on until the great financial crisis and then how the myth is, at least in my telling, collapsing in the consequences of coronavirus and the response to coronavirus and where do we go from here.

Beckworth: Sounds like a very interesting book which means you'll be back on the show in a year or two when this book does come out. So we look forward to seeing it. Now, the other thing I mentioned, you're a writer of a popular newsletter, Notes on the Crises. So, dare I say, Nathan, you are a capitalist of sorts? You have this newsletter, you sell, you make money off of it. Now I know it's a labor of love for you. You could probably view yourself as a non-profit.

Tankus: I'm self-employed. I definitely have a small business, a micro business if we're comparing revenues. But nonetheless, yes, I'm that. But on the other hand, the left doesn't believe in the worker-boss relationship. And so devolving that relationship-

Beckworth: There you go.

Tankus: ... is going to mean some more business-y activities that ordinary individuals will be engaging in. So maybe this is actually just the germ of socialism.

Beckworth: There you go. You're fulfilling the dream. So more power to labor. Okay, so you got your newsletter, you got your book coming out, and you've been writing some interesting pieces that I'm eager to get to. You had two in particular we're going to spend a lot of time on today; one on what is the Fed actually targeting, how is it using financial conditions? And you're going to tell us a story about how it's come full circle on that. Another really fascinating piece on the Fed's considerations in the past about using or issuing their own securities versus Treasury, so that's really provocative, interesting. And it's something I really want to touch on because I've had people on the show who worry about the size of the Fed's balance sheet and this all overlaps in a major way.

Beckworth: But I would be remiss, Nathan, if I did not recognize that you are a prominent, prominent individual in the MMT community, modern monetary theory. And to be fair to you and others in your community, there have been a number of people on this show who've been critical of MMT. So I want to give MMT its time on air to let us know where it stands, what you think, and maybe to respond some of the common mischaracterizations of MMT. So maybe for our listeners, I suspect many know, but for those who don't, maybe just remind us what is MMT and maybe a brief history of it and then we'll maybe talk about where you think it's going to go next.

A Brief History of MMT

Tankus: Sure. Well, that's a big topic and I can cover all sorts of things in terms of the history, what's important about MMT. So this can only be a little cursory, little burst of knowledge or information. MMT got its start in spaces outside of orthodox economics but still in the economics profession, PhD economists, a lot of people around what's known as post-Keynesian economics is where it started, not necessarily where it is now, but certainly the germ. One very prominent figure in that world is professor Randy Wray, longtime UMKC professor and then Levy Institute scholar, retiring soon. But he was a doctoral student of Hyman Minsky.

Tankus: So MMT's roots, at least its American roots, there are other people who are involved in other countries and such, is in Minsky's financial stability ideas but also focusing on things that Minsky touched on but didn't illustrate or talk about, didn't center his narrative on things about fiscal deficits, about how they worked, about how they impacted private sector balance sheets. And so some shift in emphasis with some work to really understand in more detail in those kind of areas is where people like Randy Wray went. But if you actually go back and read Randy Wray's work that he's been publishing over the last couple decades, a lot of it is about Minsky and about extending Minsky, applying Minsky to the great financial crisis, to what's going on in the 2000s housing boom, and what's been going on in the last decade or so.

Tankus: So in the popular press, MMT is just about printing money and you can have infinite money and you can do whatever you want with no constraints whatsoever. But that isn't necessarily what MMT is. That isn't what MMT is academically. And of course, as you know, MMT is not about just "printing money." It has things to say about monetary policy, it has things to say about how that relates to fiscal policy but it's about using fiscal policy and it's about using fiscal policy to manage the economy rather than using fiscal policy simply to manage itself, using fiscal policy to manage debt-to-GDP ratios directly through trying to reduce deficits or reduce the national debt or whatever, that kind of focus of fiscal policy. Obviously, there's more I could go over there but that's a little-

Beckworth: Well, let me throw out a few observations I would make, and correct me if I'm wrong. So one thing I would say defines MMT like most Keynesians and definitely post-Keynesians would be a desire for full employment as a very basic principle. You want to make sure the economy's coming along in its full potential. You also take a slightly different view on prices. So I think more orthodox, mainstream macro would say, "We’ve got to adjust aggregate demand. That is the key solution to doing it." And today that responsibility is allocated to the central banks but maybe fiscal policy can step in as well. Where I think MMT, again, correct me if I'm wrong, would say, is, "Well, there's a whole tool of options here, many different ways. You could do accurate demand. You could also do price controls, credit controls.” Is that fair that you take a much more broader view on how to manage inflation?

Tankus: No. Everything's engaging in a context, in a historical context, in a world context. A lot of MMT for many years was focused on these more basic budgetary confusions and this line... The only risk with fiscal policy is inflation risk. It's not that we're going to have a fiscal crisis. It's not that we're leaving a burden on our grandchildren. It's specifically that there's inflation risk. And that message, that core message, was so difficult to communicate, was so difficult to cut through the noise, that then the question, "Oh, okay, what is the inflation risk? How serious it is? What are other sources of inflation?" was a secondary conversation, but not because they weren't aware of it but they were post-Keynesians, they were aware of a whole literature in post-Keynesian economics.

Tankus: And then at UMKC, there's a professor, Fred Lee, who's very close to my heart, a microeconomist, which is rare in heterodox economics or in post-Keynesian economics to have people focusing on microeconomics, but he did. And he was an expert in microeconomics. He wrote a book called Post-Keynesian Price Theory. And his work continued to develop from there in a very input-output view of how production works and thus how prices work and what that all means. And Fred Lee being their colleague from 1999 to his untimely death in 2014, they were aware of these questions but it wasn't at the center of publication because it was so difficult to even get to the point of, “no, we don't have a long-term deficit problem,” in the sense that like, “oh, inherently some debt-to-GDP ratio is going to explode, get out of control, and have a fiscal crisis.”

Tankus: We have potential issues in particular markets about prices and price increases and we have to worry about policies that we can implement or things that can happen that can lead to higher growth in CPI, in "higher inflation." But that wasn't really a focus of that work because it was just not there. And it would be ridiculous when you don't really have much influence to be making the cookbooks of the future, so to speak, of an entire framework when you don't have any influence at all and no one's listening to you and it's so difficult to get a basic point through. Now obviously things changed. MMT started picking up steam after the great financial crisis, 2011, 2012, and then especially the last… what do you want to say, six, seven years? It built up steam even more.

Tankus: You got an explosion when Alexandria Ocasio-Cortez mentioned MMT in a 60 minutes interview in late January 2019 and that changed everything. And there was already things that were happening where people were taking MMT more seriously and we were starting to have different conversations. And in the process of that whole debate over MMT, the argument emerged, "Well, oh, yeah, MMT is right about this stuff or right about this debt-to-GDP ratio stuff, right about that the risk is inflation, but the risk being inflation rather than we're going to have a fiscal crisis, that doesn't actually make any practical difference. We're all in the same place.” Josh Barro wrote a piece in the New Yorker along these lines and other people started repeating this opinion too.

Tankus: And we had the things that we thought that that was really wrong. So Scott Fulwiler, Rohan Grey, and myself wrote this op-ed for the Financial Times blog, Financial Times Alphaville. They titled this something like, *An MMT Response on What Causes Inflation,* which isn't really what the piece is about. The piece is more about what kind of policy framework would you approach the inflation question from an MMT point of view and what possibilities emerge, what's the difference, why does it matter in an MMT framework versus something else. And that's what we took to answer around that time and because of that whole debate that emerged a couple months later, we decided that it would be good to have a report along these lines and really flesh out a lot of these issues. And that was a report that I was lead author on and started working on.

Tankus: And that report, which you can see, it's now called, *The New Monetary Policy* and it's all about, the argument for fiscal policy isn't that interest rates are going to be low for so long, which many people were saying pre-pandemic, the argument is a more fundamental one that we can manage the economy differently, that taxing to reduce demand is very different and has different implications than taxing for revenue. There's things that are high revenue that don't necessarily reduce demand that much; for example, taxing the rich. Taxing the rich can be good for other reasons. Reducing inequality is a reason to tax. It's a reason I'm very strongly supportive of taxing the rich. But dollar for dollar, a dollar of revenue in taxing the rich, only a small fraction of that dollar, if in some cases if at all, but generally, only a small fraction of that dollar will actually reduce demand.

Tankus: And that's where, really, this question about prices took the forefront where at the same time talking in more detail about how demand management would work in an MMT world, how budgeting would work in an MMT world, what would you spruce up, as a CBO process or whatever, would be, also started talking about, "Well, not all demand is inflation." So if you look at inflation and your only tool is demand and then you respond with demand, that's counterproductive when it's not, at its core, a demand response. And this is where I think things get a little bit confused because there's a difference between the empirical question of the balance between things being cost driven in an administrative decision to increase target profit margins or demand is driving shortages versus also just supply chain issues which can be very distinct from demand driven shortages that when you only go with demand, that's not necessarily responsive to the situation to what we need.

Tankus: And on the flip side, you can have shortages without inflation. You can have periods where you just have bottlenecks. But the actors involved for various reasons in that market structure don't increase prices just because there's a bottleneck, especially if it's temporary. So you can have circumstances where there's no problem, no signals picked up because inflation's not going up. But there is a bottleneck that policy should respond, whether it's demand should respond or whether there are non-financial regulatory tools or whether there's expansionary fiscal policy that needs to respond, like we need better ports and things are getting stuffed up in the port.

Tankus: That's a place where, potentially, you can have shortages that can be relieved by actually spending more money rather than less because the problem is pinpointed in one particular area or at least there's a concentration of the bottleneck in one particular choke point rather than just dispersed throughout the economy, where a general demand inflation is you have supply chain pressure or you have unfilled orders evenly distributed throughout the economy, relatively, and generally reducing demand will reduce those unfilled orders versus we have them concentrated in a few different choke points and you don't really relieve the choke points by trying to restrict demand overall. Long answer to your question.

Beckworth: No, no. That's good. And several things I want to comment on. One, it’s really interesting to hear you say there's a Post-Keynesian price theory book out there, so that would be something you put on your shelf next to your Chicago price theory book after you've used… That's very fascinating. I'll have to check it out and see how it's different than the standard price theory approach you get in mainstream… another thing, we'll provide a link to your paper that you just mentioned, this long policy paper that you were lead author on so people can check it out. But just to summarize, here we are in 2023, inflation is coming down and I think probably a lot of it is due to supply side, pressure's easing up for commodity prices, oil, things like that. But do you think there's any demand in inflation? And your answer may be no, but if so, what would be the MMT response at least the demand portion of it?

The MMT Response to Demand Inflation

Tankus: It's not like, say upfront, I do a lot of day-to-day, week to week writing. It's not like I've gone out and done a six-month research paper and come out with like, "Okay. Here's where we're dividing up." There's a difference between talking about policy frameworks in general and I've got my empirical thing right here. That said, I think that there is some degree of demand that’s involved because when the U.S. expands demand so much, it's such a big part of the global economy that clearly it is a part of the aggregate demand situation. On the other hand, so much of our problems, especially supply chain, has been not about the value divergences in trade but physical divergences in trade; shipping containers coming somewhere full and having to go back empty or just being stuck there because there's nothing to send back. The cost of shipping containers explodes because of that. There's these physical imbalances of trade.

Tankus: Once trade becomes physically imbalanced, it's very, very difficult to rebalance it, physically. So there's limits to how much inflation can be involved there. Cars, it seems like a lot of people could have been restricted from the car market. You could have used credit regulation to make them not be able to afford a car or just reduce their income so they can't buy cars. But nonetheless, I think the core issue is that supply was shut down and then restarted. And the microchip shortage, of course, is very prominent there, but nonetheless that's a key place. We're missing some amount of millions of cars in terms of the U.S. and that keeps the car market, to some degree, hot. I think that clearly there's a basic element in the sense that if we had not done the things that we had done, then we would be in a global depression. And if we're in a global depression, probably supply chains will ease to that.

Tankus: On the other hand, there's an extend and pretend thing with that where just like we saw, and this is… Joe Weisenthal has been especially good covering this in Odd Lots, that so much of our supply chain issues today emerge from firms that have been investing very little since the great financial crisis, expanding capacity very little and are very nervous to expand capacity because they believe that the economy's always just going to be crushed, that demand is never going to be there. If you expand capacity, then you're just going to risk your business collapsing because the demand is not going to be there and then you spent all this money in capacity.

Tankus: So if we went the global depression route way and we didn't try to aggressively respond to problems which I think is one of the positive elements of the Biden response, then we might not have supply chains issues today. But if we ever tried to go and fix the problems, our supply chain situation, our general economic production situation, would be more depressed and more decrepit. So you got to start somewhere and no time like the present, especially with all the present problems that we have, and for me, the bottom line is, preemptive response is the best response. Stopping COVID before it spreads is the best response. Then you have to deal with COVID after its spread and the consequences of COVID and that's more costly than stopping.

Tankus: In a similar fashion, the best response is preemptive response in terms of investing in ports and investing in our train system, investing in our supply chains, and building much more resilient supply chains so that they can deal with greater volatility in the global economy. We need to spruce up the entire administrative state around getting agencies that don't normally see themselves as playing a role in macroeconomics to understand that they have a role in macroeconomics. I think there was some orthodox economists who made fun of an interview I did with Vox last year, made fun of me saying that the maritime commission is involved with macroeconomics. But if you actually pay attention to what's been going on close knit with the Biden administration, it has. It has been a part of trying to ease things at the ports and it would've been much better at that job if we had been improving our port system and investing in our ports in 2016, 2017, 2018, you might not get a whole bunch of ships stuck in the port of L.A. if we had done that.

Tankus: So from my point of view, obviously MMT wasn't writing about the maritime commission in 2005, but it was nowhere near policy conversations and now we're much closer to policy conversations. So it's time to speak more concretely about how these things work. And generally, the perspective is, you want to respond preemptively, deal with these physical supply chain issues, and MMT talks about demand management all the time. The main risk of deficit spending is inflation, and that fundamentally is, demand inflation is shortages but there's also these other things. And so when you're in a concrete situation, you have to say, "Would actually restricting demand be the best thing here?" And just because that might not be true doesn't mean we're saying, "Oh, nominal GDP growth should be 40%, should be 60%. Oh, it's fine." The rate of change, of income, of demand, clearly is some kind of constraint. The question is where that is and what you do in concrete situations.

Tankus: And the Biden administration, and the Trump administration before, the U.S. government threw lots of money at lots of different problems because it didn't have the administrative capacity to preemptively be prepared for problems. And one way you can say that, "Hey, look, some of that expansionary fiscal policy caused inflation." That's one way to look at it. Another way to look at it is, our lack of investment decades beforehand, years beforehand, made that our best option given the way we had closed off our possibilities. And if you go back to before the pandemic and read that FT op-ed that Scott Fulwiler, Rohan Grey, and I wrote, that piece is very much about what kind of institutions do you need to build preemptively, how do you get the CBO to start thinking about bottlenecks and unfilled orders, how do you start collecting the kind of microdata that you would need to understand, really, what's going on in the economy in a more granular way, how do we build up those institutions to preemptively respond to problems rather than respond to problems after the fact?

Tankus: And it's funny. Talking about unfilled orders and bottlenecks in that piece… I was tweeting a lot about supply chains in 2019. It's funny and bizarre in retrospect. That's where my head was at, my head was at supply chains. The conversations in 2019 were people going, "Interest rates are going to stay low forever. Interest rates are going to stay low for a long time. We're stuck in this secular stagnation thing. We can deficit spend because interest rates are so low and this is some kind of free lunch." And that wasn't MMT people saying that. That was some progressive... That was even some right-wingers saying that. And people like myself, like Scott Fulwiler, Rohan Grey, were going, "You guys are crazy. Interest rates are low because the Federal Reserve is setting them low." So when you say we can do fiscal policy because interest rates are so low, what you're saying is you're putting the Fed in charge of fiscal policy even if you don't realize it. And I don't necessarily like that. But also second of all, demand can go up and when demand goes up enough, the Fed would respond and hey, when we have supply chain issues or supply issues, the Fed is going to see higher inflation and it's going to raise interest rates. So you can't premise your program for expansionary fiscal policy on that interest rates are going to stay low. That's a losing battle. Also, I was worried about the supply chain.

Beckworth: That's amazing.

Tankus: I saw that we had decrepit supply chains. That's why I was working on that report. I feel that it's unfortunate that the report came out in January 2022 because I started the newsletter in March 19th, 2020 and I was responding to the problems and a lot of things happened in my life and in the rise of my success and also just responding to all the things that were going on at once. So it took longer to get that done, but that report was two-thirds, three-fourths written when the pandemic started. I was trying to get it done. That was my project for 2020, was getting it done. I was presenting at conferences on nonfiscal pay fors and such and talking about supply chains and talking about direct credit regulation. And then everything overtook me, and I did that report, and now we are having a moment for that. But you can find discussions, and certainly that original op-ed doesn't say supply chains but it says unfilled orders and bottlenecks. That was my focus.

Tankus: And I really thought people were deluding themselves about this. I didn't see coronavirus coming necessarily. I wasn't focusing on pandemics and that being the thing. My model was more climate change, climate change disrupting the global flow of physical resources. But I also thought... What we're talking about, a big fiscal program, doing a Green New Deal, which was a lot about shutting down fossil fuels and doing these other things. You're going to have to mobilize the whole state, all the different administrative agencies around doing that. And once you start moving forward on demand, if you don't do anything about the Fed, if you don't integrate doing a big fiscal program with the Federal Reserve’s operating framework, they're just going to be raising interest rates and suddenly the, “we're in secular stagnation forever because we can do fiscal policy,” point of view… That's not going to hold together.

Tankus: And I was also thinking about… I say something about, and people misinterpret or just think of it as a big government statist thing, but my point about more tightly regulating a business in that piece is precisely about, if you start pushing on demand, then you're opening up the possibility for businesses raising target profit margins. And you can say that's about demand but it's also about administrative decision, what Gardiner Means called administrative inflation. And in that context, in the context where you're raising target profit margins, you have administrative inflation, the Fed's going to be raising rates. So this belief that things were going to work out because the economy was depressed forever, I really, really thought was the wrong move and that instead we needed preemptively say all the different things that you need to do if you're going to implement that kind of program. And events overtook what I was trying to get at, what I was trying to do, but I know what I was thinking in 2019 and what I was writing about and what I was commenting on. So that's where I approach things rather than, “MMT is about printing money and that's the end of the story.”

Beckworth: Yeah. No, this is interesting, Nathan, because if I'm hearing you correctly, back in 2019, you actually were worried about demand given the institutional setup we had and things could go awry and your worry was that the Fed would then have to engineer a recession or something painful. So you were worried that us mainstreamers were getting it wrong on demand, but at the same time you're cognizant of supply side issues, supply chain issues, and capacity constraints. So Nathan, let me ask one last question on MMT here and that is, what is the future of MMT as you see it? So you've just outlined how MMT for you is more than just aggregate demand management. It's a lot of other things including supply chain management and capacity considerations. And I'm curious if that's unique to you or is that something broader within the movement? But more generally, where do you see MMT going?

Beckworth: And I ask this because it's been my impression, and other mainstream macro people I talk to, is that we're not hearing as much about MMT these days as we were in 2019. You mentioned AOC brought it up. That was a huge shock. In fact, if you go to Google Trends, you can see a big spike when she says that. The other big shock, if I can say it, big, big announcement, was Stephanie Kelton's book. You were interviewed yourself in Bloomberg, was a real prominent article. And early pandemic, early 2020, I think you guys were getting a lot of attention then as well, and I guess I'm not hearing as much now. So what do you see? Are you headed in new directions and what is the future of MMT?

The Future of MMT

Tankus: The future of MMT, I would say, is building more relationships with other disciplines. Legal academia is an area where we have a lot of friends, a lot of people we want to collaborate with. In the room, generally, with economic policy, it's generally economists and lawyers and we think that should be broadened out, but also lawyers and law professors is an entry, a way in, to talking about economic policy. And there's a lot of other disciplines outside of economics that have insights in economic policy that MMT economists, MMT scholars more broadly, collaborate with. And so I see the future of MMT about getting more interdisciplinary. I'd see about focusing even more in terms of more directly economics related things; input-output economics is an area where I think there's a lot of keen interests.

Tankus: And the other thing is, MMT has punched well above its weight. There are maybe, generously speaking, a couple dozen MMT economists, maybe like 40 or 50 academics more broadly, but that's just people interested, not necessarily people we're going to be working on day-to-day economic policy things. And the only university where you can do PhD related work in economics related to MMT, at least with the support of your professors, is UMKC, which is a very underfunded university in the Missouri state system. We're not talking about the big bucks here. Not to talk too out of shop, but I think the last time I heard, you get paid as an assistantship, but it’s in the PhD program at UMKC, $11,000. It hasn't changed since the 1990s, I think, or something like that. We're talking about a lot done with very, very little resources. Obviously, I've gotten a little more resources. I've had a successful newsletter. I'm about to be auctioning off a book.

Tankus: But in general, we're talking about doing things like sticks of bubblegum, so the future is finding resources to do more of the research projects that we want to do, expanding more into legal academia and getting more deeply involved in economic policy through detailed analysis of policy, of legislation, of administrative law; that's certainly something I'm deeply interested in, and doing more of a series of reports of economic policy focused… building out what MMT insights are there for building comprehensively different economic frameworks, economic policies in these various areas. Start with direct credit regulation and the issues that grow out from that and monetary policy and how monetary policy needs to change. We're going to do some follow-ups on that, things like on banking supervision. It's in the news, so concretely, how would this work at the examination level, also related to Minsky's work on cash flow oriented bank examinations from the seventies and eighties.

Tankus: And broaden out from there to talk about environmental regulation and the potential demand impacts of different environmental regulations and other kind of non-financial regulations more broadly, tax system, expanding automatic stabilizers, how would you think about... We've had suggestions before but doing concretely comprehensive analysis of the tax code, what would need to be changed, what it would be important to change, getting rid of tax credits, turning tax credits into spending rather than tax expenditures because we think that there are all sorts of problems, macroeconomically, with tax expenditures which… you've talked with Yair Listokin on your show about some. And broaden out from there in terms of thinking about ways of reorganizing; reorganizing the way we do governance, the way we do CBO budgeting, refunding congress itself.

Tankus: Congress spends the money but it has very little money actually budgeted towards its own staff, its own research. Its own internal think tanks, essentially, have been defunded for the last 30, 40 years and I think policy negatively reflects the fact that Congress has defunded itself and refunding Congress around research is important and paying staffers better and hiring more staffers and having actual academic PhD experts on staffs who can counter what lobbyists come in and say, and saying, "No, I know that's not true and here's the research," is quite powerful. And there's all these different ways in which we can push for changing how governance works, changing how the administrative state works and showing concretely what these implications are, and rather than saying in generic terms, "Oh, this is different from that," concretely, what changes are we seeing. And some of them, some orthodox economists might look and go, "Great." There are many orthodox economists where strengthening automatic fiscal stabilizers is something where we see eye-to-eye. We have different automatic stabilizers in mind.

Tankus: A job guarantee, for example, is an automatic fiscal stabilizer that MMT thinks is really important and it's really important so that when you get demand management wrong, it doesn't mean unemployment, at least that basic level of unemployment at a base wage. I think that's a big piece for us is taking involuntary unemployment as a tool of macroeconomic policy off the table. And also just generally, it's a lot easier to reallocate labor from different areas if you don't have to worry about, "Well, if I disemploy people in one sector, that means they're unemployed." And what are the economic consequences of that? What are the political consequences of that? What are the social consequences if instead they come into a job guarantee program and then are hired out a few months later, six months later, labor reallocation becomes a lot easier; so implications like that. And now that we have a little bit more resources, a little bit more attention, people who are eager to work with us and donate their labor and time, do a series of economic policy oriented work and research around that of which the report I put out last year is the start of.

Beckworth: Okay, Nathan, let's move from the state of the MMT movement to the state of the U.S. economy and some of the big issues now facing it. And in particular, let's look at those issues you've written about and probably the most important one is the prospect of a debt default this summer by the U.S. government. Now you and your fellow MMT travelers have advocated loudly and forcefully for a mint the coin solution. So walk us through this solution. What is the case for it?

U.S. Debt Default Solutions: The Case for Minting the Coin

Tankus: The case for minting the coin, I think, is quite simple: we should avoid government defaults. I think that is just simple, direct to the point. Government default would be catastrophic and you should use any legal means that you have to avoid defaults. And the coin is a clearly legal option. It's a statute, it's statute of basis, USC code section 31, subsection 5112k. I think that's what it is.

Beckworth: I'm impressed you know that.

Tankus: Yeah. I think I got that right. I definitely got the numbers right. It might not be subsection. There might be some other term for that.

Beckworth: Sure. But still impressive.

Tankus: I’ve been talking about the platinum coin for a long, long time now. And one of the central reasons why it's clearly legal is that generally Congress is very particular about coins. They specify when they want to specify and they generally specify the face value of coins, certainly the maximum face value of coins, and they specifically made a choice to not specify the face value. They say any denomination, you can put any face value on the coin. And that was a conscious choice by Philip Diehl, the then U.S. Mint director who I've had the pleasure of having some conversations with now, and it was a specific choice he made and he found a congressman, Mike Castle, to sponsor it and it passed Congress. And Mike Castle might not have realized the implications of what he was doing but Philip Diehl knew that it was unprecedented in the history of coinage and he was pursuing it. Now, he might not have envisioned a trillion dollar coin but he knew he was giving the U.S. Mint unprecedented discretion, and not foreseeing an implication of a choice you're very consciously making doesn't make something illegal.

Tankus: If it did, the federal government would grind to a halt because there's all sorts of imaginative uses of what is clearly legal. And the trillion dollar platinum coin is clearly an example of that. And it can go as this is... We'll get into it I'm sure, it can be deposited at the Federal Reserve, fill up the Treasury's general account, fill up its checking account and continue to make payments. And the debt ceiling is just a limit on how many Treasury securities that you can issue. It's not something that's budgetary, it's a limit on the financing. And when there's a divergence between the financing and the spending, the Treasury secretary has to find some other form of financing. And if they can't find some other form of financing, then the issue of default is on the table which means you pick the least unconstitutional option as Buchanan and Dorf say in the Columbia Law Review. They say the least unconstitutional option is breaking the debt ceiling, saying full faith and credit of the United States. But my colleague Rohan Grey in his law review article, that in many ways is responding to this, is saying that we have an even less unconstitutional option which is an option that's actually constitutional which is minting a trillion dollar platinum coin. So the case at some fundamental level is basic: let's avoid default.

Beckworth: What about the concern, though, that it breaks norms, that it might create chaos? The Federal Reserve itself might be hesitant because it's legally okay but it breaks the spirit of the law. How do you respond to that concern?

Tankus: Well, I think we've broken a lot more spirits of the law than that. We break spirits of the law when it goes to having a war in another country but we don't declare it. We declare it as a special police action or whatever. There's all sorts of spirits of the law that we break. And in the grand scheme of spirits of the law… first of all, I don't necessarily buy that we are breaking the spirit of the law in terms of the Coinage Act. But second, I don't think that, even if this is, in some sense, the "spirit of the law norm," it's a comparatively minor one. Most ways you can describe this is mostly people falling asleep. You say trillion dollar coin and that gets them excited. But it's not the intricate legal reasons why people think, "Oh, this is breaking a norm." That's not really something that's relevant to most citizens. What's relevant is the government not defaulting, not impounding funds which is also impounding spending, not engaging in the spending that they've been ordered by Congress to spend. That's breaking laws. That's really breaking norms. They had to pass the Impoundment Act of 1974 about Nixon, the most norm-breaking, law-breaking president at least in popular consciousness.

Tankus: So if there's any norm that were being broken, it's the norm around, “the Federal Reserve creates money and the Treasury doesn't.” And I think that's a norm that should be broken. I think that's a toxic norm that has not been around forever. It's not in the Constitution, it's not anything like that. It's a norm that got started in the 20th century to depoliticize money and make money something about high technocracy and I think that's a toxic anti-democratic norm, and so we should break it. And the platinum coin, whatever else you say about it, it gets people's attention about money and the nature of money like nothing else. So I see it as a democratizing formation of a new norm rather than breaking a norm in a way that is calcifying for democratic culture.

Beckworth: Alright, let's go into some other solutions. And I know for you these will be second best solutions, but one could be the president declares the debt ceiling unconstitutional and he points to the 14th Amendment.

U.S. Debt Default Solutions: The 14th Amendment and Bond Buybacks

Tankus: I support it. I support it if we're not going to do the coin. I think the coin is the best option. I think invoking the 14th Amendment or just invoking full faith and credit in the Constitution, I think these are fine options. I think the same issue emerges with getting Federal Reserve cooperation. Is the Federal Reserve going to cooperate as a fiscal agent with issuance? A lot of people said, "Oh, the coin, the Fed won't accept it. Oh, let's do these other options. That's something the Treasury can do on their own.” But as Kenneth Garbade from the New York Fed’s work shows us that's a myth, that's false. Everything is the fiscal agent now. There was a time when the Treasury ordered the Bureau of Engraving to print physical bonds and they could maybe sell bonds directly to banks without the Fed being involved. But now Treasuries are just a book entry system that the Federal Reserve manages. And so they're deeply involved with the auctioning. They're the ones who are making the interest payments, they're tracking... Again, they run the book entry system. So they're tracking who owns what Treasury security and then so you need their cooperation and the Fed's skittish about the coin and they're going to be skittish about which is affirmatively legal. They're going to be skittish about issuing Treasury securities that they think are illegal to issue.

Beckworth: Another proposal is to buy back existing government bonds at their lower market value right now because the debt limit is defined by the face value so you could buy back the bonds, they're quite a bit lower and you could take that and then issue new ones and be well underneath the limit, giving you more space. What thoughts about that?

Tankus: I think that's fine as far as it goes. I don't think it's going to get you that far. I think it interferes with monetary policy much more than a platinum coin does in terms of changing the quantities that are across the yield curve. That really only gets you much bang for your buck if you're buying long maturity securities and issuing short maturity securities. So that impacts monetary policy. I think it's fine but I think we should approach this like a Gordian Knot, just cut through it rather than doing these real gimmicks. I don't think we should do gimmicks. I think we should do the platinum coin. So let's not do this series of gimmicks to try to avoid the debt ceiling.

Beckworth: Okay. Let's go from potential gimmicks and solutions to the debt ceiling to something that is related and that is: can the Federal Reserve issue securities? And you have an article you just released titled, *Federal Reserve Issued Securities: Not Such A Crazy Idea After All.* So we're going from one set of ideas to a new set of ideas. And this is interesting because, Nathan, you actually would like this to be a permanent feature of macroeconomic policy in the U.S. You would like the Federal Reserve to issue its own Treasury bills, or Fed bills I guess we would call them. Walk us through that idea and then tie it into this memo you found from the Federal Reserve.

Issuing Federal Reserve Securities

Tankus: Yeah. So this is an idea that my colleague Rohan Grey and I have been kicking around for quite a number of years, since about 2017, and I started researching it a lot more as part of doing the monetary policy report that I mentioned, *The New Monetary Policy* that got released early last year. And what I came across in my research is, I'm not original, it wasn't my proposal, I came up with it independently, but I'm not the first person to propose it. A now forgotten, but at the time, pretty important monetary economist, Albert Hart, that eventually was a professor at Columbia University, came up with it and he had this recommendation of… in the context of all sorts of debates about how you should reorganize central banking, what you should do with the Treasury in the lead up to the Fed-Treasury Accord of 1951, it's forgotten how much innovative ideas were being kicked around at the time and how many different suggestions there were.

Tankus: In that context, Hart had this proposal of, why are we still relying on the Treasury issuing securities? Treasury securities are monetary policy. So have the Treasury stop issuing Treasury securities and just get an unlimited overdraft from the Fed and then the Fed will issue Federal Reserve securities and that will give the Fed greater independence, that will give the Fed total control over how many quantities of securities to issue at any given maturity across the yield curve and have much greater control of the interest rates as a result because they are the ones that issue it. The Fed, they can buy securities, they can get the interest rate down, but if there are only so many securities outstanding or there are only so many securities in the SOMA, in their holdings, they can only sell that much. So there's limitations on how much control that the Federal Reserve has over the yield curve and if they want something to happen, they generally have to call up the Treasury, contact them.

Tankus: And so for all the talk of central bank independence, when it comes to securities, there's this day-to-day coordination and cajoling that the Federal Reserve has to go through to get the securities that they want. Whereas this suggestion, which we were kicking around, and apparently Albert Hart proposed, is the Fed should just be in charge of that. It makes more sense. This is a monetary policy tool. That's a big argument in MMT, is that for the federal government as a whole, securities are a monetary policy tool. They're not about financing. You always have the financing. The question is this monetary policy, financial conditions, interest rates thing. And so if it's a monetary policy tool, the Fed should be issuing it. For the federal government as a whole, Treasuries are a monetary policy tool, but for the Treasury specifically, it's a financing tool and also a monetary policy tool. And sometimes, those two things conflict. The best way to get them to not conflict anymore, especially when you have things like the debt ceiling, is to have debt ceiling exempt Federal Reserve securities and have the Treasury finance itself with money creation.

Beckworth: Yeah. And so what's interesting, and you highlight this in your note, is that the Federal Reserve was thinking about this and there's a memo they wrote, but you also mentioned a speech that Janet Yellen gave in 2009. And I believe the context for the speech was the Fed going into 2008, they were actually worried about their balance sheet getting too big. They were worried about reserves creating more lending, I guess, and more spending. They were worried about inflation in 2008 which seems crazy in retrospect. They should have been worried about the economy falling off a cliff, but they were worried about inflation. So they were trying to find ways to sterilize the reserves and what they settled on... Well, there were a couple things. They settled on interest on reserves and there was also Treasury that stepped in, as you know in your paper, and issued some extra Treasury bills and that was a supplemental financing program issued by the Treasury Department.

Beckworth: But I want to read this statement that you have from Janet Yellen's speech in May 2009. She's reflecting back on this and she says, "An alternative approach that could accomplish the same goal and perhaps do it better would be something completely new for the Federal Reserve. That's to issue interest-bearing debt broadly to private investors. Let's call this debt Fed bills. Congress would have to authorize it, but it is a tool available to many central banks. The sale of Fed bills would reduce the reserves of the banking system as in a typical contractionary open market operation. As with interest on reserves, we could accomplish a tightening of policy while maintaining our support of credit markets. But Fed bills would have an advantage over interest on reserves. The loans to the Fed would come from investors throughout the economy, not just from banks. At a time, when we need banks to lend the private sector to fight a credit crunch, this is a decided plus." Comment.

Tankus: Yeah. And it's a very interesting revealing statement from Yellen. Should say, in the broader context of the memo, the memo is talking very practically of how to do it. What was surprising to me is that both the staff of the Federal Reserve Board and the New York Federal Reserve were all signed... It was like a collective report, a collective memo, which means they took this a lot more seriously than I had ever thought. I'd seen a little mention of Fed bills in some 2008, 2009 things I had read but I didn't realize the extent to which they took it very seriously. But they're talking about legally limiting themselves to one year maturity, they're even talking… there’s some discussion in the memo of only issuing three-week bills. They're thinking very… what I would say is conservatively small, following the pattern of other countries issuing central bank bills and following that pattern rather than the more comprehensive thing that Albert Hart was thinking of and I'm thinking of.

Tankus: But in the discussion, what is interesting is, it points to many of the same things that Albert Hart points to and that I point to which is the dependence on the Treasury to issue securities that they want out there and that they don't have control… And they're even worried about the perception that even if you do supplementary financing bills and even if you make it statutorily so that the Federal Reserve is directing them to be issued and nominally has control over it, they're worried about a perception of losing independence, of lack of independence, because they're dependent on the Treasury issuing Treasury securities. And I think that applies more broadly to the Treasury issuing Treasury securities in general. And that's why I want this reorganization of responsibilities.

Tankus: And the memo, I think, points to very strongly… they think all their arguments for why Fed bills are superior to supplementary financing program bills, all their arguments about the dependence on the Treasury, apply to doing the more comprehensive program. And the one fly in the ointment is liquidity fragmentation; the idea that you're going to have different securities, they're going to have different CUSIP codes, they're going to be treated differently if Fed bills might not be usable as collateral for the same contracts that Treasury bills of the same maturity would be for. And so that would fragment liquidity, that would mean that, actually, for all the thing about the Fed and being able to create reserves, that Fed bills would have higher interest rates than Treasury bills. And so that's what they're worried about. And from my point of view, yes, there is a concern about fragmenting liquidity and a simple solution to that is, get rid of one. Now they're talking about, "Well, maybe we should just do Treasury securities," and I'm saying, "Well, let's just do Federal Reserve securities and retire the Treasury securities."

Beckworth: Yeah. So I've had Peter Stella on the podcast before and he used to work for the IMF, go around the world, and he found that actual problem in many places. I think, in Chile, he said at one time they had 50% of the government bill market was finance ministry and 50% was a central bank bills. So it did create some issues and your solution is, we'll just do all central bank bills versus what we have today. Let's move on to one other piece in the few minutes we have left. And this is one that you've written on the Fed's approach to monetary policy and the title is, *The Federal Reserve’s Monetary Policy Operating Procedures Have Come Full Circle: What Does That Mean for the Post-SVB FOMC Meeting?* I'm not so concerned about what that means for this meeting when it came out, but just in general, walk us through this history, this arc of history. It's apparently returning into where we started.

The History of the Fed’s Operating Procedures

Tankus: So the basic idea is that you have Martin, you have the post-Accord Fed, central bank independence is starting to reemerge a bit, but Martin is a practical guy. He used to be president of the New York Stock Exchange. He has a PhD from Columbia or doesn't have a PhD from Columbia. He started graduate work and he never finished his PhD but it was just focused on studying the New York Stock Exchange. And that expertise is what leads him to be New York Stock Exchange president in this very strange moment in the late thirties. Then he's head of the import-export bank, I think he's the first head, and then he's at Treasury. And through, which is longer conversation, a very strange set of events, he, as a result of the Fed-Treasury Accord, goes from the Treasury to the Fed and becomes a Federal Reserve chairman. But as a result of that, even though he's this knife fighter for Federal Reserve independence, for Federal Reserve agency discretion, he's not coming in as an academic monetarist or anything like that and thinking, "Oh, there's this one way that you have to do things."

Tankus: He's thinking about it as a practical finance guy. And as a practical finance guy, there's the feel of the market. There are financial conditions and the way that you influence the economy is the allocation of credit is credit and to the extent that you care about impacts on interest rates, it's to create some interest rate uncertainty to restrict the flow of credit to slow down the economy and then other times, you want to reverse that. It's very credit oriented, you have your operational target, the federal funds rate, and you have your purchase and sale policy, and in the way, you're directing the New York Federal Reserve Trading desk. You have financial conditions, your intermediate target, and then you have these broader conditions of demand, full employment, price stability, and so on. And there's a whole bunch of people who show up and go, "This framework isn't a framework at all. What are you talking about? Where can I look up the numbers? Where can I look up your specific quantitative targets?" Which is… this is important for government accountability.

Tankus: I say in the piece, and I think it's true, there's a lot of attraction among Congress, historically, to monetarism because it gives a concrete way to assess how an agency is doing. I just happen to not think it's right but there's institutional reasons why, actually, in a strange way… and you wouldn't necessarily think it would work this way, reformers are interested in monetarism because it gives you this concrete way of holding accountability. And there's this big 50-year review of the Federal Reserve's operating procedure, how is the Fed doing since it's 50 years since it's founding, and a whole bunch of academic economists show up and say, "Nah, this is crap." Alan Meltzer shows up and says, "This is crap." It's forgotten now, but he is an important person. George Bach shows up and says, "This is crap," essentially. I'm putting it crudely, of course, but in essence… And they need to develop a real framework. And so as a result, the Federal Reserve starts to develop a real framework. They start taking on these criticisms, you should focus on the money supply more. And Arthur Burns is appointed, fails through, and Milton Friedman is thrilled.

Tankus: Milton Friedman is thrilled because, oh, great, someone who actually cares about the money supply, who takes the money supply seriously and is going to go in and get them not focused on credit and financial conditions so much, get them to stop obsessing with inflation expectations, which is another story which I don't get into the piece, but Friedman thinks that the Fed is way too obsessed with inflation expectation in the late sixties and the early seventies and he's excited. We'll switch to more focus on money supply. Ultimately, Friedman comes to be disappointed because there's inflation and Burns comes in and focuses on money supply as an intermediate target but he doesn't move away from changing interest rates as an operational target. You're still talking about moving interest rates up and down. It's just now, that's supposed to impact the money supply and that's supposed to impact the broader economy. And Friedman, a few other Monetarists, Meltzer, are very unsatisfied with that. They think that's the reason why seventies inflation is happening and we just need to actually control the money supply, operational target, intermediate target, and the broader economy.

Beckworth: Just to be clear on that point. So for them, the monetarists, the operational target would've been the monetary base, so just the monetary base that in turn would influence broad money aggregates and then inflation and employment. Okay.

Tankus: Yeah. And that's a whole other piece. But that's a place where "American Monetarism" and Friedman conflicts with British Monetarism because what gets called Monetarism in Britain is moving around interest rates, moving around the discount rate, the bank rate, to impact money supplies and intermediate target to impact the economy. So their version of Monetarism, Thatcherite Monetarism, Friedman comes in and says, "This stuff's crazy. What are you doing?" And it makes sense with this decade of him going, "No, they're not actually doing it right because they're just doing it as an intermediate target."

Beckworth: Let's go through Paul Volcker and Greenspan and bring us to the present.

Tankus: So as you know, very famously, Paul Volcker, October 1979, announced, "Bang, we're doing it. We're going to do money supply targeting. We're going to do it for real. Not just this intermediate target stuff, we're going to control the money supply. The operational target is going to be the money supply. Hooray. The Friedman victory is upon us." Of course, Friedman himself gets disappointed very quickly, is disillusioned with this and says, "Oh, you're not really doing it." But a lot of people think in terms of, “Well, the Volcker shock...” Well, what that was about was actually doing Monetarism and controlling the money supply. But I think if you look closely, if you look at the transcripts which are only released in the early nineties, so a lot of the narrative of Volcker gets solidified without actually seeing transcripts, and if you look at it closely, this is still interest rate management. It's just interest rate management in a bit of a different way.

Tankus: In post-Keynesian economics, Basil Moore is really the founding figure of this kind of view. His huge book, Horizontalism and Verticalism, is all about this and this issue and him making the claim, which I think is true, and I think there's a lot more declassified memos and transcripts than he had access to that I think illustrate this, the Fed is still interest rate targeting. It's just dirty interest rate targeting. It's not announcing an interest rate target, it's instead managing interest rates by the spread between the discount rate and the federal funds rate. So when you try to control the base money, when you try to control settlement balances, the discount window is still there. So when you do it, you pull tighter, you remove what you can say is non-borrowed settlement balances from the banking system, you push on that tighter and tighter. That leads more and more actors who are willing to pay more and more, pay higher interest, to try to avoid the discount window, because there's all sorts of stigma reasons why people don't want to be in the discount window, looks like weakness. You have greater market based funding of the banking system so it's counterproductive. Your market funding will dry up. There are bigger banks. The banking system is consolidating, so it's more noticeable. There's ways in money markets to notice, "Oh, they're at the discount window, because somehow they're still making payments but somehow they're not borrowing anymore.”

Tankus: So there's all sorts of these problems that emerge. And so as you pull on that, try to pull tighter on non-borrowed settlement balances, all you're doing is pushing people to the discount window and in people’s trying to avoid that, the stigma, whatever it is, in some cases even that the bank, the region that they're in, is a tighter discount window than another region because the United States with the reserve banks, the discount window isn't administrated especially at that time, uniformly across these different regions. So you just hit a certain point where the spread is unpredictable, but essentially you're setting interest rates, you're setting these bands of interest rates that things fluctuate in and there's a certain point after which where money markets are just going to freeze up if you try to press that spread above a certain point and then they have to loosen up and pull back.

Tankus: So as a result, interest rates are getting much more volatile. They're fluctuating between much larger space, instead of interest rates are not fluctuating half a percent, they're fluctuating 4% within a week which is a huge amount for short-term money markets. They're introducing volatility interest rates but they're still setting that. They're just doing that like a ping pong game, bouncing them up and down with the policy that they're implementing. And it still has an impact. The Volcker shock was huge. It's important to say that they weren't controlling the money supply, isn't to say that they weren't having a huge impact on the economy that monetary policy wasn't very contractionary. J.W. Mason at John Jay has this great paper with his co-author about what he calls loose money, high rates and it's all about interest rate spreads. And if you look at that paper, interest rate spreads explode and stay high even if after short-term interest rates get less volatile because of the Volcker experience. And I would interpret that in terms of, Volcker scarred the bond markets because bond markets are basically just made up of people and traders and their long memory of Volcker and the Volcker experience meant that even when interest rates went down, they're like, "Interest rates can go up at any moment and they can go up a lot. So no, we're keeping those spreads high."

Beckworth: Okay. And that brings us to Greenspan.

Tankus: Yeah. So Greenspan, the economy's settling down, you're getting low inflation, the backs of the unions have been broken, you have a much more de-unionized labor market, there's all sorts of international changes that are happening, globalization. And essentially Greenspan… the world is safe for us to announce interest rates, to fully get rid of the pretension that we're doing anything about the money supply. They still talk about it sometimes, but they start announcing interest rate targets and they start talking about the future of the policy. As much as Greenspan is seen as inscrutable, Volcker was really inscrutable in terms of market participants understanding what he was doing and where he was going. Sometimes, he didn't fully understand himself.

Tankus: Greenspan is opening up under pressure from Henry Gonzalez, democratic Texas Congressman, is really pushing for accountability and wanting to know what the Fed policy is and if it's actually accomplished or what it's supposed to accomplish and how it's affecting working people. And under that pressure, they release decades of transcripts and they start having regular press conferences where they talk about their interest rate policy and then they change it. But nonetheless, we don't really know where our intermediate target is anymore. It could be anything. The Volcker experience also calls into question the money supply as an intermediate target. All sorts of things happen that make the money supply, and maybe the money supply doesn't actually track the economy. So even as an intermediate target, maybe this isn't the best, but no one's really sure. So Greenspan floats it in his famous phrase, constructive ambiguity. He's going to be unclear about what the intermediate target is because being clear would be counterproductive.

Tankus: And that leads us to today, where today we have Powell and we have Yellen before, some with Bernanke, where there's a focus on financial conditions. And wait, isn't that what we were focusing on decades before with Martin? And so from my point of view, we've come through, we've learned a lot, we have a much better process. The Fed is much more open, but ultimately we're back where we started of the Federal Reserve is setting short-term interest rates and giving forward guidance in order to influence financial conditions in order to impact the broader economy, impact employment, impact inflation. And so there's a funny way in which we're back where we started and if you're the economist, Robert Hetzel, you go, "We're back where we started, and this is terrible because the Fed is focusing on credit policy when it should be focusing on the money supply."

Tankus: But I think most other people are going, "Well, there's something to hear. Maybe some things can change." And I have my suggestions how to change the Federal Reserve's operating procedures and different ways of influencing financial conditions than interest rates. But ultimately, I think most people are not interested in going back down the money supply path whether it's in intermediate target and especially non-operational target terms. So there's a funny question about whether we went on a lot of the wrong track conceptually and should have taken more seriously some of the lessons of the Martin years even if they were wrong about some things.

Beckworth: So this is interesting because my colleague, Scott Sumner, has been a big advocate of looking to asset prices to help inform monetary policy. And in some ways, this is in the same spirit, I guess, going down that direction. And he argues that, for example, when the Fed pivoted in 2019, remember 2018, they were talking rate hike, rate hikes, even inverting the yield curve. And then quickly, they changed directions. They were responding to signals from the markets. They definitely changed direction. The stock market was doing awful. I know there were also some trade war issues in the background lurking as well, some other things going on. But to the extent that we have a mechanism that's more informed than others, the markets would be it. But this also raises questions for people who think the Fed's always there to bail out markets too. Any thoughts on that balance between using the wisdom of the crowds from the markets versus being seen as bailing out markets?

The Balance of Wisdom of the Crowds vs. Market Bailouts

Tankus: I think that there is some use to information that you can get from private market participants, but I'm not actually compelled by that it needs to be done through trading. I think people are very eager to talk about what's going on. And I think if you're a trader, if you're a market participant, and you think financial conditions are too tight and you think, "Oh, there's a real problem," and you have concrete things that you can point to, you can have those conversations and go on Odd Lots, go on Bloomberg, go on Financial Press, go on CNBC and talk about it, and people can watch that. And you can have direct conversations with Federal Reserve officials about that and press conferences and such.

Tankus: So I think how much the market trading is telling us versus participants qualitatively communicating what's going on, I think can be overblown. And the only way to really understand, even interpret anything going on with markets, is that qualitative understanding that happens on places like Twitter and in the financial press and on financial TV and so on. So I think that the movements of that actual market can be overblown. That said, I think it plays its role, but as you know with my monetary policy report, I think direct credit regulation is the way to tighten financial conditions. And I see this as going back to that Green New Deal thing and non-fiscal “pay for” for expansionary fiscal policy that we need to do for other reasons to accomplish certain social things, to get off fossil fuels, to avert climate change.

Tankus: But even separately from that conversation, I think simply, that there are forms of direct qualitative and quantitative credit regulation that we need to engage in that can tighten financial conditions without moving around interest rates. There's a lot of conversation back... Just to touch on MMT for a second, a lot of people hear MMT talk about permanent zero interest rates and think, "Oh, they're talking about crazy loose financial conditions and then they're going to explode the economy." But the flip side of interest rates is that we think that we need much, much tighter financial regulation. And if you have low interest rates, low risk-free government rates, but you have tight financial regulation, tight direct credit regulation, well, I would think, probably, financial conditions are going to be, on net, a lot tighter.

Tankus: So it's not actually talking about... In the report, I use this phrase to try to get people to understand permanent zero interest for government or on government liabilities, PZIRG rather than PZIRP. And so it's about having zero interest or a low interest rate on government liabilities that permanent R is less than G. But that doesn't mean that we want monetary policy to be loose. Monetary policy in many conditions might need to be very tight. It's just going to be tight through financial regulation, direct credit regulation. And I think Silicon Valley Bank and the consequences illustrate that because that shows how financial conditions can tighten. Obviously, we don't want to do it through a bank run and a bank collapse but, just in general, it conceptually shows that financial conditions can tighten without interest rates changing or being increased, at least government interest rates, risk-free rates.

Tankus: And we can go the full way with that and use different financial regulatory tools, which I think are part of monetary policy, to do that job. And there's all sorts of ways that the Fed could be given discretion and can loosen or tighten how much credit the banking system is creating and thus how much money that the banking system is creating, without having to give up on the Federal Reserve engaging in monetary policy. They can have discretion over their tools, maybe they shouldn't be supervising, but they can have the discretion of the tools and the FOMC every six weeks can announce, "We've expanded the credit ceilings," or "We've contracted them because this is what's going on in the economy." And maybe not every six weeks, but you understand the general scope of what I'm talking about.

Beckworth: Well, with that, our time is up. Our guest today has been Nathan Tankus. Nathan, thank you for coming on the podcast again.

Tankus: Yeah. It was great to be here. It's always great to talk.

Photo by Drew Angerer via Getty Images

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.