I’ve had considerably more contact with investments and markets than many, but I am not an economist. I simply recognized that economics, especially macro, has always been more religion than science and decided to take a deep dive in our monetary system to occupy my time since retiring. A mentor once told me that the primary job of an economist is explaining why they were wrong last year with enough specialty terminology and formulas to make being wrong appear not to be their fault.
When I discovered MMT I noticed that it was anchored in very simple logic and complied with all of the rules of accounting that I had picked up in business. I think most economists would do themselves a favor by beginning in basic dual entry spreadsheet accounting that any system of moving money must comply with. Doing so would give them a foundation in sectoral balances that are critical to macroeconomics. Every expense goes somewhere and becomes someone’s asset, and every revenue results from someone else’s loss.
When it is the private sector economy on the opposite side of the spreadsheet the concept of expense and revenue of the government take on an entirely different perspective. Business doesn’t pay much attention to the recipients of its expense items or the source of its revenues, but the government doesn’t have the luxury of isolation of its finances because the private sector is the Constitutionally mandated beneficiary and government’s authority to create currency makes moot any revenue it might generate.
How much better would the economy be if Congress legislated spending to meet needs and taxed to control inflation instead of worrying about mostly meaningless numbers of deficits and debt? The only thing holding us back from doing so is the non-existent gold standard and a lot of otherwise smart people who can’t abandon their outdated education. Few living economists were taught outside the restrictions the gold standard imposed and the fear of inflation that isn’t even applicable to a fiat currency until all productive capacity is maxed out and we realize 100% employment.
Most MMT economists make the connection to Clinton’s surplus budgets in explaining the following recessions. The housing boom started during his Presidency and was revived by Bush’s deficit spending. It was, however, Clinton that gave us the deregulation of banking that enabled the simple boom to morph into complete running with scissors on Wall St. By not generating Treasury bonds he sent investors looking for the next best thing in secure parking of excess reserves, which has historically been the US housing market.
Ironically, it was the skittishness of old school investors to adopt this new investment reality that gave rise to the derivative mortgage insurance market. This market soon became the primary driver of mortgage generation needed to attach derivatives to and more derivative trades were made than there were mortgages to insure. When the economy began to slow down in its natural cyclical pattern the weaker loans began to default and it was discovered that the rating agencies and loan originators that shed any skin they had in the game as quickly as possible were less than honest in evaluating the bundles of mortgages packaged with the derivatives.
Insurance of any type is largely dependent upon demographics, assuming that its exposure to risk is predictable if the sample is large enough. The combination of loan originators with no skin in the game and investors willing to overlook obvious flaws in the process skewed the potential default rate to such extremes that the derivatives shed value faster than the market could adjust to at the first hint of default risk. The volume of those suspect bundles became greater than the total net reserves held by the banking system, even though the actual default rate prior to the crash never exceeded 5%.
The fear of losing it all had caused a panic much bigger than the panic that preceded the crash of ’29 as major investment banks found they had invested in unicorns. The banks tried to lay off blame on home buyers who took on more than they could handle, but they soon backed away from that as it would have exposed them to discovery of how little investment they actually have in the largest investment/ store of value the middle class owns and the role deregulation played in the crash. The primary reason so few were ever charged with obvious crimes is that it isn’t actually against the law to destroy the US economy unless one specifically harms an investor. Some banks were fined but the bailout gave them more than sufficient compensation to pay those.
