WATCH: From RonT: “You keep touting IS-LM. Keynes didn’t endorse IS-LM, its crea

http://krugman.blogs.nytimes.com/2012/03/03/economic-models-and-economic-predictions/KRUGMAN WATCH:

From RonT: “You keep touting IS-LM. Keynes didn’t endorse IS-LM, its creator Hicks repudiated it later in life. Since 1971 when Nixon ditched the gold standard IS-LM was without any theoretical justification whatsoever, there is no market for loanable funds. Banks create deposits out of nothing against the borrower’s IOU, so investment creates its own savings. Loanable funds is a fairy tale of a primitive economy without banks.

Your predictions for low interest rates in this crisis were right by pure accident – the interest rate in modern economy is not set by the market, but by the monopoly supplier of reserve balances, the Fed. The Fed lets the market toy with long-term interest rates, but it could fix them at any level by the same procedure it uses to fix the short rate: QE and “the operation twist” are the proof. So if the Fed changed its mind and raised rates, your “prediction” would simply turn out wrong. The Fed and not the market for loanable funds determines the interest rate, period.”

http://www.nakedcapitalism.com/2012/02/philip-pilkington-the-liquidity-trap-and-all-that%E2%80%A6.html