MMT policy is destabilizing---it promotes risky, speculative lending and asset bubbles that crash.

First, is it really true that the MMT policy of keeping interest rates low and fiscal policy oriented to full employment, subject to an inflation constraint, amount to a stable policy? Palley, for example, has pointed out the difficulties of implementing such a fine-tuned policy, given lags in policy, uncertainty, and shocks, and the dynamic evolution of the economy such that policies can lose their effectiveness and predictable effects over time. (Palley 2019a, b). We simply do not know to what extent this kind of “fine-tuning” can succeed to stabilize the economy.

Second, there is a far larger problem that the MMT policy might engender, one that the MMT focus on sovereign money, and ignoring credit, leaves in the shadows: the possible impact of excessive private credit creation on financial speculation, bubbles and financial instability.

Numerous authors have identified the dynamic, instability inducing impacts of excessive private credit flows on domestic and international economies (Kindleberger 1978; D’Arista 2019). There is considerable evidence that, with liberalized financial markets, long term low interest rates can generate a stretch for yield, leading to risky lending, and promote asset bubbles, which eventually crash (e.g., Schularick and Taylor 2010). In conjunction with liberalized financial markets, this low rate monetary policy also contributed to the housing speculation and crisis (Mian and Sufi 2018). Further evidence is found in the work of Jorda et al. (2018) who look at the factors driving global financial cycles with a data set that spans 150 years and 17 “advanced capitalist” countries. They find that extended periods of low interest rates appear to contribute to an increase in risk-taking and can contribute to financial instability. They find that it is “fluctuations in risk premiums….that account for a large part of the observed (global) equity price synchronization after 1990….(they) also show that U.S. monetary policy has come to play an important role as a source of fluctuations in risk appetite across global equity markets.”

In short, MMT policy of very low long term interest rates and full employment fiscal policy might contribute to increases in speculative lending, asset bubbles and financial instability, both in the US and, given the international role of the dollar, to many other parts of the world. Note that these negative impacts come even from steady as you go, very low Fed interest rates in a financially liberalized and integrated world.

This does not necessarily mean that low interest rates are bad. But it does suggest that key complementary policies, such as financial regulations, capital controls, and credit allocating central banks are likely to be an important accompaniment to such policies if they are to avoid destabilizing the economy.