Paul McCulley Sees Value in MMT; Larry Fink Calls It ‘Garbage’

(Bloomberg) -- Paul McCulley and Modern Monetary Theory go way back.

The former Pimco chief economist says he’s “not a card-carrying MMTer.’’ But he has a lot of sympathy for the doctrine that’s burst into the debate about America’s public finances -- and is drawing a barrage of criticism from mainstream economists and the financial world. BlackRock Chief Executive Officer Larry Fink became one of the latest to weigh in on Thursday, calling the theory “garbage.”

MMT argues that governments borrowing in their own currencies can’t go broke and have room to spend when inflation is muted, like now. There’s supporting evidence from Treasury markets, where yields have stayed low even amid a supply glut as U.S. deficits widen.

But few Wall Streeters have been willing to seriously debate the theory’s merits, while Federal Reserve Chair Jerome Powell -– and economists like Larry Summers and Paul Krugman –- have denounced it. Fink, speaking on Bloomberg TV Thursday, warned that “deficits are going to be driving interest rates much higher and it could drive them to an unsustainable level.”

McCulley has never run with the financial herd. His thinking has been underpinned by what he calls “principled populism’’ for decades –- a span that includes his tenure as the top ideas guy at what was then arguably the world’s most successful bond fund. (His old boss Bill Gross also sounds a bit like an MMT convert nowadays.) McCulley coined two terms that became widely used to define crisis risks around 2008: the “shadow banking’’ system and the “Minsky Moment.’’

Now, he’s speaking up for MMT -– a school of thought that Powell said is “just wrong’’ and Summers called “fallacious on multiple levels.’’

Not Zimbabwe

McCulley says it offers a “robust architecture for a fiat currency world.’’ That’s a claim made by MMTers too, who say a lot of conventional economic thinking is a leftover from the days when America’s money was backed by gold.

The Pimco veteran, now a professor and senior fellow in economics at Cornell Law School, says he’s frustrated by the often-voiced view that running bigger budget deficits -- and supporting them with easy central-bank money -- is a step toward hyperinflation.

“Last time I checked, the U.S. has missed its inflation target for 10 years running, of which seven or eight were at zero interest rates,” he said in an interview. “Let’s look at reality here. Zimbabwe is not on our curve.”

McCulley doesn’t embrace everything in MMT, which has won converts among freshman Democrats like Alexandria Ocasio-Cortez as a way to finance the Green New Deal and Medicare For All.

The theory supports a bigger role for Congress in managing the economy, and a smaller one for the central bank. McCulley favors a middle path. He said the MMTers have logic on their side “but they have difficulty dealing with the political reality of an independent Fed.’’

He argues that outside of crisis times like 2008, interest-rate and budget policy should be distinct -– but cooperative. “Congress is going to have to own the unemployment target and the inflation target,’’ he said. And MMT needs to come clean about the need for changes to the Fed’s legal mandate, so it can support deficit-spending.

“They’re scared to actually talk about it plainly,’’ he said. Though he appreciates why they don’t -- because “Wall Street will get wrapped around the axle.”

‘Pathological’ Inequality

Former New York Fed president Bill Dudley called MMT a “crackpot theory” in a Bloomberg Radio interview Wednesday. But the gap between his view and McCulley’s may not be as wide as it seems. Dudley also acknowledged that “better coordination between the fiscal side and the monetary policy side would help the economy” in a downturn.

McCulley says the Great Recession provided insight into how that could work. But he says that too much of the recovery effort was left to the Fed.

The result was “pathological’’ levels of income and wealth inequality, he says. Because monetary policy works “by driving up asset prices. And rich people own assets.’’

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