A dilemma for conservatives

Milton Friedman helped revive capitalism when he showed that the Great Depression didn’t show capitalism was unstable, but rather that monetary policy had been unstable.  Some critics argue he actually was a closet interventionist, as he thought capitalism required active stabilization policy.  Perhaps, but one could also argue that he was saying “as long as the government runs our monetary regime, they need to do it well.”  Sort of like a libertarian arguing that if governments build our bridges, they should build them so that they don’t collapse.

In any case, conservatives later started to drift away from the Friedman/Schwartz view of the Great Depression, and became increasingly disdainful of “demand shock” explanations of the business cycle.  This created a huge problem in 2008, as conservatives had great difficulty defending the free market, which seemed to have once again failed us.

To be sure, they did find some important policy failures; from the GSEs to deposit insurance to the regulation of the ratings agencies to the moral hazard created by “Too-Big-to-Fail.”  Nevertheless, given all the bad loans that were made without government pressure, by private banks, to middle class borrowers, it was pretty hard to completely absolve the private sector.

I believe that abandoning the Friedman/Schwartz view of the business cycle was a big mistake.  It’s not that this view would have magically absolved the private sector from any role in the sub-prime fiasco, I’m somewhere in the middle on this issue, believing both regulators and private actors made huge mistakes.  Rather the F/S view would have absolved the financial crash from being the primary cause of the Great Recession.  It would be much easier to live with the occasional financial fiasco if it didn’t lead to a Great Recession.  Remember 1987?

If RGDP hadn’t fallen sharply in 2009 then the banking crisis would have been resolved much more easily, with far less public money.  For that to have happened we would have needed to prevent NGDP growth from turning negative.  And that would have required that conservatives accept the F/S view of the Great Depression, instead of drifting toward “real” theories of business cycles.

Why focus on conservatives, weren’t liberals also clueless about monetary stimulus?  If people like Fisher, Plosser, and Hoenig had warned that aggressive monetary stimulus was needed to prevent a severe slump; does anyone really believe the doves at the Fed would have stood in the way?

In 1930-33 the policies advocated by Friedman and Schwartz would have been viewed as being highly progressive.  Later Friedman moved away from steady monetary growth toward policies that would offset velocity shocks—even more progressive.  It’s a pity that so few liberal and conservative economists picked up the torch when Friedman died in 2006.  What is “the torch?”

1.  Demand shocks drive the business cycle.

2.  Monetary policy is the best tool for demand stabilization.

3.  Monetary policy is very powerful at the zero bound.

How many economists believed all three in October 2008?


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49 Responses to “A dilemma for conservatives”

  1. Gravatar of Jeff Jeff
    23. March 2011 at 18:19

    So if the government isn’t the ideal director of monetary policy as you implied in the first paragraph, what do you provide in alternative?

  2. Gravatar of Morgan Warstler Morgan Warstler
    23. March 2011 at 18:25

    The reason for pulling your money out of the market, is so after prices fall as you expect, you can come in and buy things cheap. You are SACRIFICING any gains from making the wrong choice.

    This is not a liberal or conservative idea… it is fact.

    If you do not give the smart guys who got out all the hard assets cheap… nothing else matters. No one will play the game correctly again.

    Now, in light of that hard fast rule, that makes all game play possible… we must ask ourselves what the Fed should have done with Monetary Policy.

    My answer is that they should have allowed the liquidation to happen, such that the banks suffered – and then when the smart guys had the assets, moved in with Scott’s magic plan.

    Perhaps the Fed should have said, “If you do Stimulus, we will not do QE2,3,4” – something that would have brought the conservatives around – made it a binary choice.

  3. Gravatar of Joe Joe
    23. March 2011 at 18:33

    I’m going to go on a limb and say that the number one thing that has hurt laissez-faire and continues to stimy (I think thats spelled right) it is the business cycle.

    The great moderation was one of the reasons neoliberalism was popular. Now, imagine if we had another… and another… and another….

    Joe

  4. Gravatar of Steve Steve
    23. March 2011 at 18:36

    Hi Scott,

    You are too prolific of a blogger. I actually wanted to complement you post from 3/21 “Recessions are predictions.” Really good post. I think people many economists who understand the importance of expectations still fail to understand the degree of importance. You get it, but many do not. I want to make a poker analogy; I bet big in poker, the opponent infers I am weak, because if I wanted him to call, I wouldn’t have bet big. This is what I learn from my insomniac nights of falling asleep in front of TVs. Expectations are complex and iterative.

    My own view is that through July 2008, I believed the Fed was targeting a combination of core CPI, unemployment, and financial stability. After all, those are the legal mandates. Roughly, this equates to an NGDP target with more tolerance to the upside than the downside. In August and September 2008, I changed to a belief that the Fed was targeting headline CPI below 2%, no exceptions. That is why I enacted my own personal austerity plan, effective September 2008.

    Your blog is my favorite because you retain a degree of intellectual objectivity that is rare in the over 30 year old crowd. Some of us still had shards of idealism remaining. Thanks, Scott.

  5. Gravatar of marcus nunes marcus nunes
    23. March 2011 at 18:38

    Scott
    Right on, and remember that on the destivities of MF´s 90th birthday in 2002, no one less than Bernanke said something to the effect: “You showed us that in the 1930´s we were wrong. We thank you and will make sure it doesn´t happen again”
    On Friday the “Shadow Open Market Committeee” convenes.
    This is a preview of Michael Bordo´s “Policy Brief” presentation:
    The Prospects for Inflation Ahead
    by Michael D. Bordo, Rutgers University
    Most observers today argue that since core inflation is considerably below the implicit inflation target of 2%, and unemployment and the output gap are still too high, that inflation is not an important worry for policy makers. Yet commodity prices are rising and headline inflation is also rising. It will likely take a long time for headline inflation to feed into core inflation through the conventional mark up channels but once it does it will be hard to dislodge as the experience of the Great Inflation taught us.
    He really didn´t “learn” anything!

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. March 2011 at 19:45

    Rivlin’s speech last night is still bouncing around in my head. She was nominated by Clinton so I guess that makes her a Democrat. In her speech she implied monetary policy is currently impotent, and the focus of her speech was the fiscal crisis, which naturally (sooner or later) involves less fiscal stimulus. Talk about internal contradictions!

    My take away from it is why are so many progressives so incredibly dumb when it comes to monetary policy? They’re almost as fixated on structural causes as the vulgar Austerians. And most other conservatives may know better but they have absolutely no incentive to hit the gas pedal until they are assured of reaching their other (implicit) goals.

    Unless progressives wake up they’re going to continued be led around by the nose and kicked in the economic policy @$$.

  7. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. March 2011 at 20:55

    Mark: Surely Scott’s point is both sides are clueless. For every Rivlin on the left there is an inflation phobe on the right. Monetary policy is hard (or at least somewhat counter-intuitive) and technical with no specific ideological or political benefits.

    Scott: On folk not getting it, here is former Fed Governor Prof. Rick Mishkin being very kind about Bernanke but going on to worry awfully about the Fed’s balance sheet:
    the Federal Reserve took extraordinary actions during this crisis, and I actually think deserves a lot of credit for helping avoid a depression, which is – we actually came pretty close, in any case, but avoided the worst problems.

  8. Gravatar of Tim Tim
    23. March 2011 at 21:24

    Wouldn’t the private sector be absolved in a Fischer Black view of the world? Black viewed the Fed as passively accommodating the private sector’s demand for outside money. When the Fed fails in this bad things happen.

    The widening TED spread starting in mid-2007 was a sign that Bernanke was not doing his job. The seize-up in the money market cascaded into the capital market, culminating in the panic of September 2008.

    Bernanke has rectified his mistake and that’s all we can ask of the Fed. As long as he stays the course the economy will eventually get back to trend growth.

  9. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. March 2011 at 21:35

    Lorenzo from Oz,
    You wrote:
    “Mark: Surely Scott’s point is both sides are clueless. For every Rivlin on the left there is an inflation phobe on the right.”

    Yes, but for every person on the right who knows better there is no counterpart on the left (well, maybe, Yglesias). The most highly respected people on the left are all dribbling children (even supposedly wise octogenerians like Rivlin) when it comes to monetary policy. I see this proved over and over again. I’m saying this as someone who (at least currently) votes Democratic.

  10. Gravatar of Greg Ransom Greg Ransom
    23. March 2011 at 23:03

    The great macroeconomist of the present crisis period has beeb William White.

    Read his papers at the BIS web site, and his post BIS papers for the IMF andmThe Fed.

  11. Gravatar of Lorenzo from Oz Lorenzo from Oz
    24. March 2011 at 01:43

    Mark: In that case, there is something deeper going on. Since monetary explanations do not increase the general role of government (rather the reverse), indeed, imply that the market system fundamentally works fine, perhaps it is just a bit to uncongenial/runs into too much ideological resistance. After all, is there a great monetary theorist associated with the left? (I know Milton Friedman used to claim Karl Marx as a monetarist, but monetary theory is not exactly what Karl M is noted for.)

  12. Gravatar of Richard Allan Richard Allan
    24. March 2011 at 04:25

    Irving Fisher? John Kenneth Galbraith? These aren’t suggestions, as such, I’m just tossing out names.

  13. Gravatar of Jon Redden Jon Redden
    24. March 2011 at 05:00

    Love the content Scott. I would love to see/hear more from Bentley profs and alumni online (i.e. Chicago, George Mason, UCB).

  14. Gravatar of W. Peden W. Peden
    24. March 2011 at 07:09

    Lorenzo from Oz,

    Karl Marx was certainly not a monetarist. He might have paid some attention to the old quantity theory of money, but while all monetarists are quantity theorists not all quantity theorists are monetarists.

    (If we define monetarist as a quantity theorist who does not believe that V is not constant and who attributes a causal role to the public’s bank deposits rather than just notes & coin.)

    Richard Allan,

    Irving Fisher yes. I don’t think even JKG’s supporters would claim that he was a great MONETARY theorist, whatever his other virtues as an economist. Anyway, neither apply because I think that Mark was looking for contemporary figures.

    Otherwise, J.M. Keynes would be an obvious candidate for a great monetary figure associated with the left.

    Greg Ransom,

    Didn’t William White claim that the Fed should have popped the housing bubble with high interest rates? In other words, he would have been willing to drive down NGDP (which was attrend level from 2002-2007) in the hope of somehow counteracting skewflation in the housing markets. He also believes that it would have taken VERY tight monetary policy to achieve this.

    In other words, if William White had had his way, we’d be in the mess we are now in 2002 and we would still be there today, with below-trend NGDP, and there’s no reason to believe that there wouldn’t have been a housing bubble since the housing bubble (in my opinion) was at least partly caused by the relatively cheap prices of importable goods caused by the China affect, which could have been more severe had the US dollar been stronger.

    That doesn’t sound like a great monetary economist to me, but then again I’m largely unfamiliar with his work.

  15. Gravatar of Doc Merlin Doc Merlin
    24. March 2011 at 07:24

    @W. Penden
    “Didn’t William White claim that the Fed should have popped the housing bubble with high interest rates? In other words, he would have been willing to drive down NGDP”

    The fed DID pop the housing bubble with higher interest rates. It was as soon as they raised rates that the crash in the ARMs came.

  16. Gravatar of Greg Ransom Greg Ransom
    24. March 2011 at 07:49

    This isn’t really White.

    But in any case, I think the theory you assume here is bogus.

    The idea of the economy falling into a static and endless monetary disequilibrium across decades makes no sense to me.

    Scott has never met my challenge — at what point do we acknowledge that it make no sense to “correct” a monetary disequilibrium from the past? E.g. how many years after the monetary disequilibrium of 1933 do we still need to look back and “correct” the disequilibrium? 10 years? 20 years? 40 year later? 50? Why not correct it 80 years later?

    Without an answer to this question Sumner doesn’t have a causal mechanism robust enough to explain the phenomena — or dictate policy.

    Penden,

    “Didn’t William White claim that the Fed should have popped the housing bubble with high interest rates? In other words, he would have been willing to drive down NGDP (which was attrend level from 2002-2007) in the hope of somehow counteracting skewflation in the housing markets. He also believes that it would have taken VERY tight monetary policy to achieve this.

    In other words, if William White had had his way, we’d be in the mess we are now in 2002 and we would still be there today, with below-trend NGDP, and there’s no reason to believe that there wouldn’t have been a housing bubble since the housing bubble (in my opinion) was at least partly caused by the relatively cheap prices of importable goods caused by the China affect, which could have been more severe had the US dollar been stronger.”

  17. Gravatar of Greg Ransom Greg Ransom
    24. March 2011 at 07:52

    Penden — White if I remember correctly quotes Hayek to the effect that it better policy to not created a boom – bust economic disaster in the first place, rather than build a theory focused only on what do to after the disaster strikes –a disaster made inevitable by the dictates of that very theory.

  18. Gravatar of Greg Ransom Greg Ransom
    24. March 2011 at 07:57

    I don’t get this:

    Penden writes,

    “there’s no reason to believe that there wouldn’t have been a housing bubble since the housing bubble (in my opinion) was at least partly caused by the relatively cheap prices of importable goods caused by the China affect”

  19. Gravatar of Greg Ransom Greg Ransom
    24. March 2011 at 08:00

    The consensus right now doesn’t buy this — the original “shocks” have involved in massive changes in relative prices, involving capital goods (houses) and the financial markets. I.e. William White’s anticipation of issues on the SUPPLY SIDE.

    Sumner writes

    “1. Demand shocks drive the business cycle.

    2. Monetary policy is the best tool for demand stabilization.

    3. Monetary policy is very powerful at the zero bound.”

  20. Gravatar of W. Peden W. Peden
    24. March 2011 at 08:00

    Greg Ransom,

    That sounds well within the banal mainstream view of the crisis i.e. a boom-and-bust cycle caused by easy monetary policy. Why was monetary policy easy? Well, nominal interest rates were low and we all know that they’re a FAR better guide to monetary conditions than NGDP, don’t we?

  21. Gravatar of Greg Ransom Greg Ransom
    24. March 2011 at 08:01

    It looks like the big guns at the IMF are looking for tools to stabilize the supply side and the financial side — e.g. capital markets.

  22. Gravatar of Scott Sumner Scott Sumner
    24. March 2011 at 08:06

    Jeff, I’d like to see the market run the show, through NGDP futures targeting.

    Morgan, Yes, the Fed certainly should have said that if the fiscal authorities do more then they would do less. If they had a sensible monetary policy, which they don’t.

    Joe, That’s my view as well.

    Steve, Thanks, I greatly appreciate those comments.

    Marcus, The key is to look at market expectations, and I agree that inflation is the least of our worries.

    Mark, They use the Keynesian model, which makes monetary policy look weak when rates are low.

    Lorenzo, Good point.

    Tim, No, the private sector made too many bad loans, regardless of what the Fed was doing. Read Tyler Cowen’s post about putting bananas on the roof.

    Greg, Did he complain about tight money in 2008? That’s all I want to know.

    Thanks Jon.

  23. Gravatar of W. Peden W. Peden
    24. March 2011 at 08:23

    Greg Ransom,

    If you look at statistics in the UK and US in the last decade, it was apparent that house price inflation was high, while total price inflation was low; meanwhile, the price of products that could be imported from emerging markets stayed very low relative to the level of inflation.

    Therefore I don’t buy the story that easy monetary policy caused the housing bubble, because I know of no evidence that such a monetary policy existed and there certainly wasn’t a general inflationary trend in that period. So we must look for alternative explanations.

    One difference between houses and Ipods is that one can import Ipods from emerging markets, whereas shipping houses across the Pacific is less practical. So, since there was a China effect in the prices of many goods and there was no China effect in housing, the China effect left people with more money to spend on a product that wasn’t receptive to the increased productive capacity of emerging markets. In other words, skewflation.

    This skewflation (along with other factors) meant that property was a natural target for investment and this investment became based on unrealistic expectations of future prices.

    Now, consider the counterfactual case where the US had had higher interest rates from 2001 onwards: the dollar would have been stronger, reducing import prices and leaving people with more money to spend on houses. White’s Fed would have responded to this exacerbation of the housing boom with… Higher interest rates and a consequent stronger dollar, increasing the price skew between importable goods and houses. So White’s Fed raises interest rates EVEN more and pursue an ultra-tight monetary policy. This doesn’t address the skew between importable goods and houses, but it does depress NGDP below the trend level.

    In other words, his Fed would take us to where we are now, just much quicker, all for the sake of a snake-oil remedy to the housing bubble.

  24. Gravatar of Alexnder Arnon Alexnder Arnon
    24. March 2011 at 08:32

    It should be of some comfort that, however few believed money was tight at the time, many more believe it now thanks to this blog.

    As for people on the left who talk sense about monetary policy, I’d cite Menzie Chinn, Jim Hamilton (if he’s a liberal), Nick Rowe (but he’s Canadian), and…Paul Krugman. I think that he’d agree that money was tight in late 2008 (though he may not have articulated it at the time) and that looser policy would do us a lot of good today. Same goes for Mark Thoma. Their issue is basically exactly what’s in this post: monetary policy is weak because everybody thinks its weak. Until the Fed can credibly commit to looser policy, nothing they do can have a significant impact. And as long there are Plossers and Hoenigs close to the FOMC, they think nobody will believe their commitment.

    Really though it seems to me that anyone with a new Keynesian model in mind should see that policy was tight, even if their model gets stuck at the zero bound. And if I remember right there were a bunch of Taylor rule estimates putting the optimal interest rate well below 0 (I think Rudebusch at the SF Fed called for -5% around early 2009).

  25. Gravatar of flow5 flow5
    24. March 2011 at 09:18

    Milton Friedman was the dumbest economist to ever live & be heard.

  26. Gravatar of Benjamin Cole Benjamin Cole
    24. March 2011 at 09:24

    Scott Sumner–

    Re real estate loans. Indeed, the entire commercial real estate loans sector was busily making loans right into 2008, without the slightest interference from the government. No Fannie, Freedie, Ginnie, No Weenie.

    The CMBS market allowed this, and was globally financed. Easily.

    Yet commercial real estate values, at least in high-quality Southern California office buildings, fell in half. This was a classic private-sector real estate bust.

    I still say a global glut of savings plays a role in this, and makes for a puzzle for policy-makers. For decades, we have been told savings are good. Can you have too much of a good thing? Japan?

    PS I agree with this post 100 percent, as usual. I am an individual with his own mind–at least I think so. Maybe I am Scott Sumner’s wayward twin in econo-land.

  27. Gravatar of W. Peden W. Peden
    24. March 2011 at 09:40

    Greg Ransom,

    “The idea of the economy falling into a static and endless monetary disequilibrium across decades makes no sense to me.

    Scott has never met my challenge “” at what point do we acknowledge that it make no sense to “correct” a monetary disequilibrium from the past? E.g. how many years after the monetary disequilibrium of 1933 do we still need to look back and “correct” the disequilibrium? 10 years? 20 years? 40 year later? 50? Why not correct it 80 years later?

    Without an answer to this question Sumner doesn’t have a causal mechanism robust enough to explain the phenomena “” or dictate policy.”

    I never said anything about either a ‘static or endless disequilibrium’ or about correcting such a disequilibrium.

    My point is simple: if William White’s view is that monetary policy should have been tighter in order to address the housing bubble, then he would have been skewing the money supply out of line with demand and still wouldn’t have addressed the structural imbalances in the US economy. He sounds like a walking disaster.

  28. Gravatar of Doc Merlin Doc Merlin
    24. March 2011 at 09:55

    @W. Peden, Greg Ransom, Scott

    My answer is that you can’t. When central, planning induced monetary disequilibrium starts it causes expectations to change, when the problem is fixed, it creates another adverse shock. There is no way for central planners to fix their past mistakes without causing more mistakes and misallocations. This is one of the many reasons why we need to end centrally planned money.

  29. Gravatar of Doc Merlin Doc Merlin
    24. March 2011 at 09:58

    @ Benjamin
    “Re real estate loans. Indeed, the entire commercial real estate loans sector was busily making loans right into 2008, without the slightest interference from the government. No Fannie, Freedie, Ginnie, No Weenie.”

    The Fed artificially holding down interest rates counts as “involvement.” And while the fed isn’t technically part of the government, it has monopoly charter and may as well be. (If I were to print my own bills DocMerlin Dollars I would go to jail, as the founder of liberty dollar found out.)

  30. Gravatar of Greg Ransom Greg Ransom
    24. March 2011 at 12:12

    White and his research team also talked about China money and international inbalances, and now famous pathologies on Wall Street, among other things — the kind of stuff you’ll also find in Hayek.

    And no, the malinvestment stuff linked to monetary policy is in White, bu was NOT in mainstream economics.

    Peden writes,

    “That sounds well within the banal mainstream view of the crisis i.e. a boom-and-bust cycle caused by easy monetary policy. Why was monetary policy easy? Well, nominal interest rates were low and we all know that they’re a FAR better guide to monetary conditions than NGDP, don’t we?”

  31. Gravatar of Greg Ransom Greg Ransom
    24. March 2011 at 12:18

    Peden, rather than invent “what Wiliam White thinks”, you need to read his research reports and papers. You aren’t on track at all in your inventions.

  32. Gravatar of Greg Ransom Greg Ransom
    24. March 2011 at 12:35

    Here’s the difference between White and Sumner.

    Scott is only interested in how to fix the leaking reactor once it has been damaged by a Tsunami — he can’t explain why the Tsunami which lead to the reactor problem was set in motion — and he doesn’t have any interest in doing so, such things live outside his formal mathematics and his causal imagination.

    White explains what causes Tsunami — and he warned in advance against building poorly designed reactors which would make any Tsunami a far bigger disaster.

  33. Gravatar of W. Peden W. Peden
    24. March 2011 at 12:41

    Greg Ransom,

    I should have clarified: that is a mainstream “public” (talking heads and so on) explanation of the crisis, not a view that has been advanced in scholarly articles in mainstream economics.

    As I said, I’m unfamiliar with White’s work. My knowledge of him is as someone who predicted the crisis and who wanted higher interest rates-

    http://www.spiegel.de/international/business/0,1518,635051,00.html

    “The prevailing model was banal: no inflation, no problem. But White wanted central bankers to take things a step further by preventing the development of bubbles and taking corrective action. He believed that interest rates ought to be raised in good times, even when there is no risk of inflation. This, he argued, counteracts bubbles and makes it possible to lower interest rates in bad times. He also advised the banks to beef up their reserves during a recovery so that they would be in a position to lend money in a downturn.”

    (His view in the last sentence is eminently sensible.)

    “As an adviser to German Chancellor Angela Merkel’s group of experts, White helped to shape the basic tenets of the new order. And the 79th annual report of the BIS, published in Basel last week, also reads like pure White. It lists, as the causes of the crisis, extensive global imbalances, a lengthy phase of low real interest rates, distorted incentive systems and underestimated risks. In addition to improved regulation, the BIS argues that “asset prices and credit growth must be more directly integrated into monetary policy frameworks.”

    If I’ve invented anything, I’m unaware what is invented. White’s position seems transparent to me: money should have been tight enough to prevent the housing bubble. On the basis of past experience, at best that would have had to be very, VERY tight.

    Of course, William White may have said things in his research that contradicts what he said to De Spiegel.

  34. Gravatar of Greg Ransom Greg Ransom
    24. March 2011 at 12:45

    White was considering this general problem — in the context of the new financial instruments — very early on, most importantly in the 2001-2005 period.

    And if memory serves, his views changed.

    Peden writes,

    “if William White’s view is that monetary policy should have been tighter in order to address the housing bubble”

  35. Gravatar of Greg Ransom Greg Ransom
    24. March 2011 at 12:47

    The dates matter here.

    Peden,

    “White’s position seems transparent to me: money should have been tight enough to prevent the housing bubble.”

  36. Gravatar of W. Peden W. Peden
    24. March 2011 at 12:56

    Greg Ransom,

    Agreed. I mean he felt that money should have been tighter in the 2002-2005/2007 period and specifically as tight as would be necessary to prevent the housing bubble. However, the only objective and usable definition of a bubble that I know is skewflation causing high levels of speculation in a particular sector. I don’t see how tighter money can prevent that skewflation, though I do see how it can reduce inflation as a whole by reducing NGDP.

  37. Gravatar of Doc Merlin Doc Merlin
    24. March 2011 at 13:11

    @W. Penden
    “On the basis of past experience, at best that would have had to be very, VERY tight.”

    1. Depends on the time lag between the bubble starting and the fed doing something. The longer that lag, the more tightness it takes to stop a bubble.

    2. The fed will not raise rates to a high level simply because the federal government has borrowed enough that it effectively “owns the bank” now. If rates are raised too highly, the US government will crash, because we are far too heavily in debt in short term low interest debt.

  38. Gravatar of W. Peden W. Peden
    24. March 2011 at 13:14

    Doc Merlin,

    At the very least, William White thinks that interest rates have to be very high.

    I have no idea what he thinks about the federal government’s part in such an operation.

  39. Gravatar of Morgan Warstler Morgan Warstler
    24. March 2011 at 14:01

    Getting Scott to focus on when the Fed should have tightened money is very hard indeed.

  40. Gravatar of Greg Ransom Greg Ransom
    24. March 2011 at 14:10

    Don’t forget White’s productivity norm considerations.

  41. Gravatar of steve steve
    24. March 2011 at 18:13

    Scott- Why do you ignore debt? Wouldnt a demand shock, or almost any shock, produce different results when consumers have less debt than if they had record levels of debt?

    Steve

  42. Gravatar of Doc Merlin Doc Merlin
    24. March 2011 at 18:57

    @steve:
    “Scott- Why do you ignore debt? Wouldnt a demand shock, or almost any shock, produce different results when consumers have less debt than if they had record levels of debt?”

    I have made this point quite a bit on this blog. Also, monetary shocks would be different depending on debt. Debt increases the effect of monetary movements.

  43. Gravatar of Greg Ransom Greg Ransom
    24. March 2011 at 23:42

    Don’t confuse Sumner with all this reality.

    “Scott- Why do you ignore debt? Wouldnt a demand shock, or almost any shock, produce different results when consumers have less debt than if they had record levels of debt?”

  44. Gravatar of Lessons not learned « Historinhas Lessons not learned « Historinhas
    25. March 2011 at 04:15

    […] a recent post, Scott Sumner concludes by saying, in reference to Friedman´s “torch”: 1. Demand shocks drive the business […]

  45. Gravatar of thruth thruth
    25. March 2011 at 08:20

    I imagine that most conservatives don’t get past #1 on your list

    “1. Demand shocks drive the business cycle.”

    Because to belive that you have to believe in preference shocks, expectations traps and all that other pixie dust.* And once you embrace those ideas, you’re on the road to social planning.

    * Sticky prices maybe get a pass because as a right minded conservative, you can argue they were created by government. But the conservative solution to those is deregulation not monetary policy (and, hence, disagreement on your point #2)

  46. Gravatar of Scott Sumner Scott Sumner
    25. March 2011 at 18:02

    Alexnder Arnon, I strongly disagree. Find me the quotations from late 2008 where Krugman, Thoma, etc, said money was very tight.

    If your statement was accurate there is no way in hell I ever would have even started this blog. I looked around for people saying money was tight, and couldn’t find them (although I didn’t know about some of the quasi-monetarist blogs at that time.)

    Benjamin, Commercial RE did not crash in 2006-07, as you correctly noted. Indeed it was still strong in mid-2008. It crashed in late 2008, which is exactly what one would expect if there had been no commercial RE bubble, but that falling NGDP had sharply reduced the value of commercial RE.

    steve, You asked;

    “Scott- Why do you ignore debt? Wouldn’t a demand shock, or almost any shock, produce different results when consumers have less debt than if they had record levels of debt?”

    Good question. In theory it shouldn’t make much difference, but in practice given current Fed policies it might complicated monetary policy quite a bit. I have many posts encouraging fiscal and regulatory and tax reform to encourage saving and reduce debt. Abolish the GSEs. Abolish the mortgage interest deduction. Abolish taxes on capital and go to a progressive consumption tax. Switch to fully funded private accounts for retirement. Go with medical HSAs, which also encourage saving. I’m all for more saving, more equity, and less debt. I’ve also advocated minimum 20% downpayments on mortgages.

    So I haven’t ignored debt.

    Doc Merlin, and Greg, Read my reply to steve and see how inaccurate your comments were. You guys both read my blog a lot. Surely you both know I am obsessed about getting debt down to lower levels.

    Thruth, Robert Lucas taught me that monetary shocks drive the business cycle. Does he count as a conservative?

  47. Gravatar of Lorenzo from Oz Lorenzo from Oz
    25. March 2011 at 18:49

    The US has both high unemployment and no inflation to speak of, yet folk such as Megan McArdle can argue about (or, more specifically, against) Phillips Curve trade offs as if that is even a sensible dilemma at the moment. Talking about fighting the last war, or even the war before that …

  48. Gravatar of thruth thruth
    26. March 2011 at 11:45

    “Thruth, Robert Lucas taught me that monetary shocks drive the business cycle. Does he count as a conservative?”

    In case you couldn’t tell, my response was mostly tongue in cheek. (I’m completely non-partisan by the way). Nonetheless my impression is that when conservative economists are towing the party line they aren’t emphasizing demand shocks. The nuances of demand shocks and monetary policy don’t sell well to a base that seemingly only wants to hear about personal and fiscal responsibility.

  49. Gravatar of ssumner ssumner
    26. March 2011 at 17:49

    Lorenzo, I think she is mostly arguing that the natural rate of unemployment is higher than 4%, which is probably true today.

    Thruth, I suppose that’s right.

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