There is now a market monetarist blog in France.  Nicolas Goetzmann has published some MM articles at Atlantico.fr.  He’s also supplied me with useful tips about the situation in Europe.  It’s good to see that Nicolas is now blogging. France may need some help on the demand side, as the new government doesn’t seem to be doing much for the supply-side of the French economy.

There are now MM blogs in Canada (Rowe), Brazil (Nunes), Denmark (Christensen), Germany (Kantoos), Britain (Britmouse), Australia (Lorenzo), and now France.  I’m probably leaving some people out.  If so, contact me and I’ll add your name to the list.

Market monetarism is becoming a global phenomenon.

People often argue that financial crises lead to slow recoveries.  But I rarely see people argue the reverse; that slow recoveries cause financial crises.

It’s incredibly easy to make the reverse causation argument for the current eurozone crisis, or for the US financial crises during the Great Depression. But what about the US crisis of 2008? There certainly was significant financial stress before the recession began, or indeed even before economists were predicting a recession. So the reverse causality argument is more difficult to make for the US banking turmoil in 2007. But what about the much more severe crisis in late 2008?  In that case I think we can easily make a reverse causation argument.  Markets correctly began to realize that monetary policy (NGDP growth) was becoming too tight, and that a long slump was getting underway.  This reduction in expected future NGDP led to lower current levels of AD, and also lower asset prices.  This asset price decline greatly intensified the financial crisis in the fall of 2008.

Financial markets are forward-looking.  As soon as they recognize that a long slump lies ahead, asset prices will crash.  That will often (not always) cause a financial crisis.  Ironically the cause of the crisis occurs after the effect, which is why it’s so often misdiagnosed.

PS. In one nanosecond a commenter will point out that the cause isn’t really coming after the effect.  That’s getting too deep into metaphysics for me.

PPS.  I see a number of liberal bloggers trying to defend Obama by arguing that recoveries from financial crises are usually slow.  I don’t get it.  Are they claiming recoveries are slow because of a lack of AD?   Yes, but then the problem is insufficient monetary and fiscal stimulus, not financial turmoil.  Are they claiming recovery is slow for structural reasons?  Maybe, but I thought that was the conservative argument that liberals generally treated with contempt.  Can someone help me here?

Here’s Paul Krugman:

Some have asked if there aren’t conservative sites I read regularly. Well, no. I will read anything I’ve been informed about that’s either interesting or revealing; but I don’t know of any economics or politics sites on that side that regularly provide analysis or information I need to take seriously. I know we’re supposed to pretend that both sides always have a point; but the truth is that most of the time they don’t.

And here’s Milton Friedman, from a book edited by Lanny Ebenstein:

In 1964–to the disgust and dismay of most of my academic friends–I served as an economic adviser to Barry Goldwater during his quest for the Presidency. That year also, I was a Visiting Professor at Columbia University. The two together gave me a rare entree into the New York intellectual community. I talked to and argued with groups from academia, from the media, from the financial community, from the foundation world, from you name it. I was appalled at what I found. There was an unbelievable degree of intellectual homogeneity, of acceptance of a standard set of views complete with cliche answers to every objection, of smug self-satisfaction at belonging to an in-group. The closest similar experience I have ever had was at Cambridge, England, and even that was a distant second.

The homogeneity and provincialism of the New York intellectual community made them pushovers in discussions about Goldwater’s views. They had cliche answers but only to their self-created straw-men. To exaggerate only slightly, they had never talked to anyone who really believed, and had thought deeply about, views drastically different from their own. As a result, when they heard real arguments instead of caricatures, they had no answers, only amazement that such views could be expressed by someone who had the external characteristics of being a member of the intellectual community, and that such views could be defended with apparent cogency. Never have I been more impressed with the advice I once received: “You cannot be sure that you are right unless you understand the arguments against your views better than your opponents do.

HT:  David Henderson.

During the campaign, Mitt Romney was about the only GOP candidate who refused to criticize Ben Bernanke. Romney kept emphasizing that the number one problem is jobs.  Then Fed-bashing Rick Perry entered the race, threatening Romney’s path to the nomination.  Now Romney was forced to switch to an anti-Fed position, to prevent all the Tea Party-types from shifting to Perry.

Here’s Bruce Bartlett in the FT:

Whoever Mr Romney names as Fed chairman, it is almost certain that he or she will take a more hawkish line on monetary policy. There are already a number of inflation hawks on the 12-member policy making Federal Open Market Committee, which includes, in addition to the seven members of the Federal Reserve Board, five of the 12 regional Federal Reserve presidents. (These presidents are named by local boards for each bank and are neither appointed by the president nor confirmed by the Senate.)

At a minimum, it is doubtful that the Fed will continue to maintain its present policy of being highly accommodative.

I am skeptical of this argument.  Suppose Romney’s elected and his Treasury Secretary Glenn Hubbard presents him with these two options:

1.  Appoint John Taylor, who is a highly respected but controversial economist.  Taylor will tighten monetary policy, and perhaps lead us into a repeat of 1937.  The slowdown will make it impossible to meet your campaign promises for jobs, deficit reduction, or almost anything else.

2.  Appoint Greg Mankiw, a highly respected Republican economist, who would breeze through the Senate almost unanimously.  He would continue the Bernanke policies, but he doesn’t have much of a paper trail, so there’s nothing for his critics to latch onto.  He would allow you to hit your policy targets.

These assumptions are not just pulled out of thin air.  Later in his FT piece Bartlett says the following:

By all accounts, Mr Taylor was disappointed not to have been named chairman of the Fed when Mr Bernanke was named instead. Taylor’s very vocal support for Mr Romney’s election would appear to put him in a good position to achieve his goal should Romney win.

Possibly standing in the way of Mr Taylor’s ambition is the economist Glenn Hubbard of Columbia University, who is Mr Romney’s principal economic adviser. He also previously served as chairman of the Council of Economic Advisors under G W Bush. (Mr Taylor was also a member of the council in the administration of Bush senior.)

It is thought that Mr Hubbard is the one who thwarted Mr Taylor’s ambition to become Fed chairman previously by having Bernanke returned to the Federal Reserve Board in 2006, even though Mr Bernanke had only completed a three-year term on the Board the previous year.

This could be important because Mr Hubbard is thought to have ambitions to be either Treasury secretary or Fed chairman. (In the interest of disclosure Mr Hubbard and I worked together at Treasury during the elder Bush’s administration.) If named Treasury secretary, Mr Hubbard would have a great deal to say about who the president names to the Fed.

I can almost guarantee that some of my commenters are so morally depraved that they will insist I am “defending Romney,” even though this entire post is devoted to calling Romney a liar.  But that’s the world we live in.

HT:  Christopher Mahoney

From Reuters:

Chancellor Angela Merkel said on Tuesday Germany needs to stimulate domestic economic demand and urged opposition parties to stop blocking proposed tax cuts in the upper house of Parliament.

My working hypothesis for the last four years has been that the entire world went insane on or about Oct 1st 2008.  Is there anyone out there who still doubts me?  Seriously?