An argument about monetary policy I had never heard before

This paper studies a model in which a low monetary policy rate lowers the cost of capital for entrepreneurs, potentially spurring productive investment. Low interest rates, however, also induce entrepreneurs to lever up so as to increase payouts to equity. Whereas such leveraged payouts privately benefit entrepreneurs, they come at the social cost of reducing their incentives thereby lowering productivity and discouraging investment. If leverage is unregulated (for example, due to the presence of a shadow-banking system), then the optimal monetary policy seeks to contain such socially costly leveraged payouts by stimulating investment in response to adverse shocks only up to a level below the first-best. The optimal monetary policy may even consist of “leaning against the wind,” i.e., not stimulating the economy at all, in order to fully contain leveraged payouts and maintain productive efficiency.

That is from a new NBER working paper by Viral V. Acharya and Guillaume Plantin.

Since I don’t see share buybacks as “draining” the economy of investment (the funds simply get recycled to other companies and ventures), I can’t agree with this argument.  Still, if you are worried about buybacks, perhaps you should think twice about always pushing for easier monetary policy.


It seems a bit like another version of Austrianism, basically too low interest rates cause malinvestment. Of course Tyler is correct, in a steady state situation it would have no impact since any leverage taken out would be recycled back into the economy again. But there is perhaps a case for unexpected lowering of nominal interest rates causing mal-investment and distortion to the economy. Similar to the argument about unexpectedly high or low inflation causes distortion. Let's say we have a company that thanks to bad investments is somewhat shaky and cannot borrow much due to poor debt service coverage ratios. Rival firms who are better managed have higher leverage. When interest rates are unexpectedly lowered the poorly managed company situation now improves much more than the well managed companies. So poor management practices are rewarded in this transitory situation.

Agreed, there would certainly be a lot of distortion in the economy almost anyhow. But there’s a wider point to be made about this post.

Not stimulating the economy at all in response to an adverse shock is actually leaning WITH the wind not against the wind. If only no one had listened to the Keynesians during 2009-2019 this very good but VERY old idea of leaning with the wind by not stimulating the economy in a crisis would have prevailed. The market system would have sorted itself out with some losses here and there. We would not have experienced prolonged difficult economic conditions. We would not have the problem of envy of the rich (many of them would rightly have been un-riched at least temporarily). We would not have had the so-called populism. China would not have had space to rise by artificial means. There would not be riots of unreasonably rising expectations. Trump would definitely not have been elected. Brexit would have happened in 2016 without a murmur. There would have been some order in the world. By now things would now be back to lo normal.

Thanks for the counter-factual wish-cast. Been an education.

A) every economics "just so" story has an opposite but equally persuasive "just so" story
B) "you can't squirrel away wealth" is just such a story

Hayek (triangle) , Milt (pluck theorem), Fama (information processor), Krugman (agglomeration theory), Shannon (optimum congestion in value added net) Coase (let transaction costs be assumed zero) , Nash (equilibrium on constant, known uncertainty). The line yields theory of everything. Nothing likes to wait in line anywhere.

Kling, PSST, is number theory, this is the Baumol process of rescaling. The economy constantly rescales, returns to scale are never constant. Capital flows. Steven Hawkings, now flow no quantization. The main algorithm systems use is compression, making a flow fit into a constrained channel to make the hologram. At equilibrium, the velocity equation works, and that is the aim of the currency banker, it is making what math guys call a quotient ring, a working algebra for accounting.

The abstract tree concept. Great, economists figuyred out that phyicicists copy the option market idea. A currency banker is doing a double side Black-Shoales, no safe rate, rates are created ex post. Supply and demand has been a error for economists forever. Supply tends to equalize demand when the Walmart checkout manager gets clerks and customers to form a stable dual structured queue by changing items per basket.
And so on. Forget Keynes, there is no string pushing. Go rewrite your econ text, sorry.

Selgin, corridor banking and boundary conditions for the optimum currency banker. A few others whom I have forgotten, this is old news. TOE is nailed.

How does it work in practice?
The currency banker is the market maker fo demand and supply of liquidity, a conserved quantity. The banker keeps the variation between the two within a known uncertainty constant. The currency banker keeps an account called currency risk which will be bounded white noise. This is ow standard practice in fintech, by the way, a well know basis for the new monetary systems. We be doing this after the Trump shock.

Forgot to add. This is the basis of Google new AI system, the one that wins at chess.

While I am here, let me mention fractional approximation theory. and essentially the math guys are solving this which is great news for number theory and theory of primes. It is also the basis of the singularity, a self learning system. In Fintech we atomate this, whcih is why we need SecureID, we need to get the humans out of the lop, let them deploy trading bots. The current central banking system will be redone, I call it the New fed. It also tells us systematically how to make government more efficient, it leads to the solution to stepping around hard bounds, like the state system. Finally we get a new math, generator theory, we model the complete value added net as a generator and we get an algebra of generators when redundancies are always eliminated when discovered. Bunches of good stuff, likely an epoch jump in productivity in the years to come. Millennials be happy.

Good diatribe. Flesh it out a little more, drop the irrelevant comments and I think you would have an interesting read.

I'm always amazed at how disconnected these abstracts are from the contents of their papers. If you read the paper you can hardly justify this quote by Tyler without a thousand qualifications.

Well said.
It’s rare to see an abstract of an economics paper that is comprehensible AND accurately summarizes the paper.

Share buybacks are intended to raise share prices, as the result of both the buybacks themselves and the reduced number of outstanding shares. What this study is saying, in the context of share buybacks, is that we have chosen rising asset prices rather than investment in productive capital as the path to prosperity. Who knew? Is the choice the result of low interest rates? No doubt low interest rates facilitate leverage to help fund buybacks, but the most recent binge of share buybacks was funded by the Trump tax cuts for corporations, corporations choosing to use the tax cuts to fund share buybacks rather than investment in productive capital. To focus on low interest rates is to miss the forest for the trees.

". . . use the tax cuts to fund share buybacks . . ." Do you have evidence?

I'm not sure.

Global negative-yield bonds total $15 trillion. Forty percent of European investment-grade corporate bonds yield less than zero. This could be sending money to US equities.

Over the past 10 years, US corporate debt is up 60% to a record-high $16 trillion - I think largely due to low rates. This year, corporate share repurchases are expected to be an estimated $1 trillion. repurchased.

In any case, using cash flows from after tax net income is highly preferable to borrowing/debt to fund share repurchases.

Connecting some dots.

Planck's constant and Avogadros's number are equivalent measures.
A city with a homogeneous population will have an Avogadros's number, the optimum number of residents.
Central banking is different from optimal currency banking and works more like a proton.
Value added nets are spanning trees and the distributive property in asymetric flow is an operation on a graph. The commutative property is the ability to exchange order in an optimally congest structure queue. But it is always an approximate number system, good only up to a known constant. We get this from Coase and Nash. Coase assumes transaction costs zero and that allows freedom to exchange nodes in a value added generator. Nash tells us these will be unique exchange if change is adiabatic. So we get a general relationship between graph theory something called self sampling system, systems in which one queue sample the other and visa versa, they can never get it exactly right but always tend to reduce imbalances using the Baumol process (which becomes a graph manipulation). There is a group at Oxford that worked this out. Nn adiabatic changes in the value added netork cause a rank reduction, re assembly and rank expansion, this is Milt's pluck theorem. Quasars are ive color system, they pack energy into an information structure. The number of colors is equivalent to an N-entry accounting system. And so on, the connections go on and on and on, a lot of science books will be rewritten. Most of your physics constants are derivable from generator theory. Chart analysis using the golden ratio is correct, it is not some weird number it is an optimal L/S ratio ina perfect two color system. All sorts of stuff are beginning to fit together.

I am a short dick man!

I’ve got a teeny weenie
Little weenie
Teeny weeny little weenie.

And the TOE explains that deju vu is the discovery of an arbitrage moment and initiates a baumol process. The agent discovers a repeating sequence, actually. And this is why we have Hamilton and his peak oil prices regime change.

It tells us how vision works, tells us how and why we rebuild synapses. The list is endless, TOE affects most of science.

My weeny is slightly smaller than average, I admit..

I am a short dick man!

Buyback proceeds may also get recycled back via leverage provision

In the big, big picture share buybacks probably don't mean all that much to the whole economy. The money pilfered through share buybacks isn't set on fire, it's spent on things. They are instead an advanced version of the operations of bygone financial titans like Jim Fisk. The shares are repurchased with company funds, or even borrowed money, money that belongs to the actual shareholders, and then awarded to upper management, employees of the corporation. Not so oddly, the same people that bloviate over the unjust power of organized labor to increase costs don't have a problem with management looting the business.

In the next paper, Viral V. Acharya and Guillaume Plantin will rigorously analyse how many angels can dance on the head of a pin

Obviously it's beneath Tyler to cite a factual basis for the conclusion that share buyback money actually is recycled into new investment.

I love how you think that literally investing in your company is somehow NOT investing in your company.

It's completely awesome thinking. Seriously.

We live in a world of globalized capital markets, and money is a fungible commodity. So how can we posit a "monetary policy," except as the combined and uncoordinated monetary policies of several central banks, most importantly being the Federal Reserve, but also including the People's Bank of China, the Bank of Japan, the European Central Bank, perhaps the Bank of England, and even for a while the Swiss National Bank (little known is that the Swiss National Bank conducted a quantitative easing program of about 1 trillion dollars, to curtail the appreciation of the Swiss franc).

Some people insist that monetary policy has been too tight, which is the same as saying that the cumulative effect of monetary policies of the world's major central banks has been too tight. Maybe so, but much of the world is slipping into deflation.

but much of the world is slipping into deflation.

There are about 20 countries where prices are declining, of whom three (Saudi Arabia, the UAE, and Switzerland) have a productive capacity of some modest consequence.

I am a short dick man

What ever happened to Modigliani-Miller?

If "genius" is the most scarce factor (per Benzell et al. ) then a systemic element that privately benefits entrepreneurs ("geniuses" per Benzell) and reduces their incentives would be a big deal.

Since I don’t see share buybacks as “draining” the economy of investment (the funds simply get recycled to other companies and ventures), I can’t agree with this argument.

How do we know the money spent on buybacks gets recycled this way? We don't.

Plus, of course, the criticism of buybacks is fairly specific. It's that Trump's tax cut was promoted on the basis that the savings would be reinvested by the companies receiving the cuts, and that the funds were used for buybacks instead.

So I think TC is missing the point about them.

The Fed has a crystal ball.

Comments for this post are closed