Wednesday, April 23, 2008

Pumping liquidity?

If there is a punditesque phrase that irks me, then it must be "pumping liquidity." As in: "Why the Fed is still pumping Liquidity Into the Commercial Paper Market," or "Pumping Money: Financial Market Liquidity Explained," or "King commits to pumping more liquidity into banking system." The imagery is hydraulic, as if the economy were a machine, or perhaps a living body, with money circulating like blood, and the central bank the heart keeping it moving. Back in 1985 Brian Griffiths (in The Creation of Wealth: A Christian's Case for Capitalism (Intervarsity Press)) took issue with this metaphor, arguing that it inadequately explains the reality, and that the fault therein lies in the philosophy of monetarism, which views money and banking in this light. It does not do justice to the reality of the situation.

The metaphor of "pumping liquidity" suggest that central banks simply print money and somehow inject it into the economy (Milton Friedman's Money Helicopters), which if true would be inflationary in the highest degree. But that is not what occurs. When the central bank "injects liquidity" or "pumps liquidity" into the market, it is simply making liquidity available to its immediate customers, commercial banks, at less stringent, more accommodating conditions than hitherto. Either the interest rate is lowered or the range of acceptable assets to be taken in exchange for that liquidity is expanded.

The reality is this: money is never simply issued at no cost. It is always given in exchange for marketable assets.

Therefore, the issue of money is a market operation, a contractual operation, an exchange. Please check Common-Law Conservatism (pp. 58ff.) for more on this. It's really time that conservatives in particular stopped looking at banking as some sinister plot, bankers as conspirators against the common good. "The central bankers" are the core of capitalism; to criticize banking is to criticize capitalism. One must be honest about these things.


Lewis said...

I just stumbled upon your blog by clicking an ad on a sports message board.

As I am a libertarian and reformed Christian, I am sympathetic to some of your views, but are you serious about central bankers being the friends of capitalism? Free banking is the friend of capitalism.

Ruben Alvarado said...

Hi Lewis,

I come out of the Austrian school way of thinking myself. But there are shortcomings to Austrianism which dovetail with the shortcomings of Lockean political theory. I take this up in my little book, which if anything will get you thinking critically about Christian economics. Hitherto there has been no alternative to Austrian economics for market-oriented conservatives. But there is an alternative, called property-based economics, which takes into account the legal system as something which cannot be abstracted away, as economists are always striving to do.

The argument for central banking is rather complicated but stems from the fact that valuation is ultimately a function of sovereignty. This includes market valuation. Without sovereignty, valuation across society, binding valuation, cannot be accomplished. Thus property and contract arise through the instrumentality of sovereignty. For instance, the common law developed in England as the king's law, the law common to all his subjects, otherwise it would not have developed. Both top-down and bottom-up is involved, not one to the exclusion of the other.

You'll see these themes recurring in my new book Covenant and Capital, but they are also in Common-Law Conservatism in introductory fashion. I would encourage you to take a look. I am convinced it offers a viable alternative to Austrianism for Christian free-market adherents.