Hi Ellen,
It's me that's dense for not being clear that I'm not defending Operation
Twist. I'm just saying that it provides the best historical precedent for
current monetary policy.
That there is no market for loanable funds does not fly in the face of the
evidence, just in the face of the hundreds of mainstream monetary
economists who have mined data and shaped our understanding of monetary
policy.
Paul, unless people like Eatwell, Milgate, Garegnani or, generally
speaking, the Italian Marxist school of monetary economics are completely
off the wall, loanable funds theory is logically inconsistent. Someone
issuing corporate bonds or taking out C & I loans can be understood in
terms of their theories as well as in terms of loanable funds theory.
Ellen, I take your point about large established firms not being credit
constrained while smaller firms are as evidence that you agree with the
idea of financial-market segmentation. Perhaps you could recommend some
readings for Paul?
The implications of the interest-rate insensitivity of investments in
capital-goods industries for mainstream monetary theory is too easily
glossed over by pointing out that household purchases of consumer durables
are interest-rate sensitive. I should think that only a monetarist would
find household expenditures on consumer durables equivalent with corporate
investments in plant and equipment. Once the issue becomes sucking up
household income with higher finance charges for consumer durables rather
than increasing the cost of investments in plant and equipment, why not use
a theory that emphasizes the effect of monetary policy on income
distribution rather than a theory that emphasizes the effect of monetary
policy on an aggregate demand function? For example, if the wage includes
a moral and historical element, then higher finance charges for consumer
durables reduces it in a way that it is difficult for the working class to
organize against and resist. Higher interest rates thus lead directly to a
higher general rate of profits.
Investment committees at large firms listen to staff reports that discount
expected profits by hurdle rates. But the effect of Keynes' "animal
spirits," irrational exuberance, etc., on expected profits reduces the
finely calibrated present-value calculations to absurdity.
Edwin (Tom) Dickens
Ellen Frank wrote:
>
> Forgive me for being a bit dense. I haven't kept up
> with this literature, but the idea that there is no market for
> loanable funds seems to fly in the face of the evidence.
> I mean someone issued all those corporate bonds and
> took out all those C&I loans, right? There is, I know, a
> lot of evidence that large established firms are not credit
> constrained, but this is certainly not true of smaller firms.
> The housing and real estate development industry -- a
> key industry and leading indicator -- relies very heavily
> on borrowed funds and is quite interest-sensitive, and that's
> just looking at housing starts, not even counting the impact of
> higher interest rates on retail mortgages and home-buying
> behavior.
>
> Furthermore, even large firms must consider interest
> rates when weighing the return of potential investments.
> Don't high interest rates raise hurdle rates? And don't high
> interest rates lead banks to curtail credit, because there
> aren't that many investments that can earn high enough
> returns to cover the interest and repayments? Not just business
> loans but consumer loans as well?
>
> I think the impact of high rates on distribution is important
> and underemphasized. But I really have trouble with the
> idea that this is the only, or even the primary, channel
> by which high interest rates impact the economy.
>
> Ellen
>
> Tom Dickens writes:
> The interest-rate insensitivity
> of investments suggests the irrelevance of a transmission mechanism of
> monetary policy via an argument in a mainstream aggregate demand function.
> Heterodox economists tend towards specifying a direct effect of interest
> rates on income distribution.
>
> Key players at the Fed currently argue just the opposite: That excess
> aggregate demand relative to savings is driving up long rates, such as on
> mortgages and corporate bonds. But I question the underlying assumption of
> a loanable funds market...
>
> >
> >Edwin (Tom) Dickens
> >
