Fed: MMs were mostly right during the Great Recession

The new Fed policy represents an implicit acknowledgement that the Fed erred during the Great Recession, and should have done enough stimulus to offset the deflation of 2009.

This is basically the argument made by market monetarists back during the Great Recession. Yes, our argument referred to offsetting the fall in NGDP, but offsetting the fall in the price level would have implied the same sort of make-up policy. Prices and NGDP tend to move in tandem when monetary stimulus is applied. During periods of slack in the economy, an extra 1% inflation implies much more than an extra 1% in NGDP growth. I’d estimate that the Powell doctrine applied back in 2009 (if credible) would have given us roughly 80% of what we were asking for.

I won’t live that long, but perhaps David Beckworth will get a public apology from the Fed when he turns 90. 🙂



41 Responses to “Fed: MMs were mostly right during the Great Recession”

  1. Gravatar of Garrett Garrett
    29. August 2020 at 09:13

    If you wanted to you could link to blog posts you wrote in 2009 calling for the Fed to get back to trend and compare and contrast with what the Fed is now saying they’ll do.

  2. Gravatar of ssumner ssumner
    29. August 2020 at 09:22

    Good idea, but I’m too lazy!

  3. Gravatar of marcus nunes marcus nunes
    29. August 2020 at 11:23

    Although the Covid19 shock has also no common element with the Great Recession, a comparison between the two is instructive from the monetary policy point of view. This is so because the Great Recession
    was the “desired outcome” of the Fed´s monetary policy.

  4. Gravatar of Julius Probst Julius Probst
    29. August 2020 at 13:18

    I was almost shocked when I saw you linked to a piece I wrote when I was still a Master student, thanks !
    I hope David and you will get the apology you fully deserve.
    One can only dream.

  5. Gravatar of ssumner ssumner
    29. August 2020 at 13:45

    Marcus, But hopefully desired no longer.

    Julius, It’s what Google brought up first.

  6. Gravatar of Postkey Postkey
    29. August 2020 at 14:11

    “The new Fed policy represents an implicit acknowledgement that the Fed erred during the Great Recession, and should have done enough stimulus to offset the deflation of 2009.”

    They should have done ‘this’ ‘sooner’?

    “ . . . Bernanke was joining these debates and
    27:46 he was in 2008 the only central banker
    27:49 to implement my advice the true
    27:51 quantitative easing because the other
    27:54 slightly changed the definition . . . “

    “This would explain why the trebling of the Fed balance sheet in late 2008, due to purchasing non-performing assets, did not result in a significant weakening of the US dollar or inflation: no money was injected into markets due to this banking sector accounting mop-up operation. It did, however, have the desired result of strengthening banks’ balance sheets enough to produce more than 5% bank credit growth in 2012 and a significant recovery.”

  7. Gravatar of Benoit Essiambre Benoit Essiambre
    29. August 2020 at 14:49

    Maybe the Fed and the ECB should apologize to all of us for causing a quasi collapse of western civilization.

  8. Gravatar of Gene Frenkle Gene Frenkle
    29. August 2020 at 14:59

    The high quality of academics that the field of macroeconomics attracts is evidence of how important a field it is…but this pandemic should hammer home that macroeconomics isn’t magic. So I pointed out that Kamala Harris’ genius high achieving father and Obama’s genius high achieving father both studied economics as graduate students at elite American institutions because there was a belief that if developing countries could just get the macroeconomic policies right then everything else would fall in place. So Jamaica and Kenya didn’t become developed nations because macroeconomics isn’t magic.

  9. Gravatar of Benjamin Cole Benjamin Cole
    29. August 2020 at 15:16

    As I recall, among MM’ers in 2008 there was one wag who advised the Fed to print money until it was “full-tilt boogie boom times in Fat City.”

    Instead full recovery took 10 years.

    Good luck everybody.

  10. Gravatar of Tacticus Tacticus
    29. August 2020 at 15:28

    I have no/little influence with the Fed, but some with the BoE. Their chief and senior economists understand and appreciate MM and NGDP targeting, but there are political problems in implementing these things. I don’t quite know what to do about those problems, as a self-admitted hater of democracy and universal suffrage. Perhaps I should have done my PhD in public relations, rather than sovereign debt.

  11. Gravatar of Gene Frenkle Gene Frenkle
    29. August 2020 at 16:01

    Ben Cole, sounds like you would support a $1 trillion reparations program at this point in history…characterizing the money as reparations for slavery would merely be a pretext to get dollars to people that would definitely spend those dollars thus increasing aggregate demand.

  12. Gravatar of ssumner ssumner
    29. August 2020 at 22:25

    Tacticus, These ideas take time. Inflation targeting started as a fringe idea, which was not viewed as acceptable to real world central banks.

  13. Gravatar of Benjamin Cole Benjamin Cole
    30. August 2020 at 04:33

    Gene Frenkle–

    C19 lockdowns have me confused, as does the reality of central banks building balance sheets long-term (at least, perhaps permanently) while people say we are not conducting money-financed fiscal programs or MMT (well, Michael Woodfood says the US is doing helicopter drops).

    One problem with macroeconomics is people do not even agree on what they are arguing about. A quarterback only gets three strikes and he is out!

    Certainly, slaves were entitled to reparations, the famous 40 acres and a mule. Perhaps descendants of small farmers and workers, who had to compete againt immigrant slave labor, are entitled to compensation too.

    The administratability of such a program, at this late date, strikes me as impossible.

  14. Gravatar of Gene Frenkle Gene Frenkle
    30. August 2020 at 08:09

    Reparations would be very easy to implement because we have tax returns and SS numbers. So all I care about is the economics and quite frankly it is a no brainer because, and not to sound insensitive, persistent and pervasive racism have led to real wealth disparities. So descendants of American slaves just happen to be a group of people that will spend every penny they get very similar to the white baby boomer parents of the 1950s and 1960s that participated in an economic BOOM.

    With respect to the magic of macroeconomics I just came across this, the macroeconomists that did such a great job in Australia in 2008 apparently haven’t been doing such a great job lately…just more evidence that the dysfunctional American economy from 2001-2008 was the product of an energy crisis. From the Guardian Australia in 2019:

    Wages are stagnant. Wealth is falling. House prices are down. Consumers aren’t spending. Businesses aren’t investing. Interest rates are at record lows and may be heading for zero. The federal government and Reserve Bank seem locked in an arm wrestle over whether fiscal or monetary policy should be used to generate more stimulus. Unemployment has stopped going down. Overseas, storm clouds are darkening.
    Though the last national accounts showed the Australian economy grew by 1.8% in the year to March, things feel worse than that. If the economy is not actually tanking, it is certainly anaemic. Has Australia entered a new, post-growth phase?


  15. Gravatar of Thomas Hutcheson Thomas Hutcheson
    30. August 2020 at 09:35

    Rather than an apology, I’d settle for an explanation of why they chose to disregard their Congressional mandate. What objective function subject to what constraints were they pursuing? This seems like a good project for an economic historian.

    “80%?” I’d say much more. Keeping inflation at the pre 2008 level would probably been optimal until March 2020. Since March there has arguably been some amount of supply shock so that inflation should be above 2%, but that is just a few months and admittedly it is hard (absent a NGDP futures market) to know just how much above 2% it should be. So the estimate of percentage rate-months of inflation deviation/total percentage-rate months since 2008 must be far greater than 80%.

  16. Gravatar of Gene Frenkle Gene Frenkle
    30. August 2020 at 15:04

    From your Beckworth link:

    “Unfortunately, despite entering a recession in December 2007, inflation did not significantly slow down in 2008 even though real economic activity slowed down at a rapid pace. The main reason for that is that global commodity prices were in general at an all time high in 2007/2008 and only fell significantly thereafter once the U.S. economic downturn spread to the rest of the world. The U.S. economy thus also experienced a negative supply shock in 2008 while simultaneously facing a negative aggregate demand shock.

    The graph below shows the dollar price of oil (per barrel). The oil price peak is exactly when the U.S. experiences the worst recession since the Great Depression in the 1930s. Talk about bad luck.”

    “bad luck”?!? Perhaps the two are related?? 😉

  17. Gravatar of Spencer B Hall Spencer B Hall
    30. August 2020 at 15:59

    People still don’t get it. Link: “Quantitative Easing and Money Growth: Potential for Higher Inflation?
    Dr. Daniel L. Thornton (former senior economist, FRB-STL)
    D.L. Thornton Economics LLC

    “the close relationship between the growth rates of required reserves and total checkable deposits reflects the fact that reserves requirements apply only to checkable deposits”

    The monetary base is not: “Monetary base Sum of the currency held by the public and reserves held by financial institutions with the Federal Reserve Banks.”

    The monetary base is equal to required reserves (which have been discontinued). Any increase in the currency component contracts the money stock – not expands the money stock.

    The upshot is that the base contracted at a negative rate of change for 29 contiguous months turning otherwise safe assets into impaired assets (upside down and underwater). Just as the proxy for inflation turned south so did housing prices.

  18. Gravatar of Benjamin Cole Benjamin Cole
    30. August 2020 at 17:24

    Gene Frenkle: I am wary of defending or attacking any macroeconomic theory (or more accurately, “theology”) for its putative performance in a time of C19.

    C19, and related economic straitjackets and shackles, wreck an economy.

  19. Gravatar of Gene Frenkle Gene Frenkle
    30. August 2020 at 18:06

    Ben Cole, the first law of thermodynamics was the “straightjacket” that undermined the 2001-2008 economy but the economists believed physics didn’t apply to the economy because macroeconomics is magic!

    And now we know some magic that will actually work and economists don’t want to wave their magic wand—implement a $1 trillion reparations package and watch the GDP growth hit 4% and the growth will be equitable and sustainable and we will have the first strong economy since the 1990s! This past decade was a crap economy and 2001-2008 was just dumb and the coronavirus has at least revealed the awful truth.

  20. Gravatar of marcus nunes marcus nunes
    30. August 2020 at 18:42

    By focusing on IT, AIT, or even PLT, will not lead the Fed to, one day, adopt NGDP-LT. However, adopting, explicitly or implicitly NGDP-LT those other targets will also be satisfied!

  21. Gravatar of Spencer B Hall Spencer B Hall
    31. August 2020 at 07:38

    Re: “Talk about bad luck”

    That’s not “bad luck”. It’s real ignorance. It is predictable. I guess you actually have to trade the financial markets in order to recognize the repetition in trends.

    It is a wholly unrecognized fact that banks do not loan out deposits (savings). So, any increase in bank-held savings destroys the velocity of circulation. As the economic cycle swings, more bank deposits are relentlessly shifted into savings. Thus, unknowingly the FED continually adjusts its policy by trying to offset the concealed decline in AD by pushing inflation up at a faster speed than the growth of real output.

    But finally, one economist figured part of it out. Link: Dr. Philip George’s “The Riddle of Money Finally Solved”

    “When interest rates go up, flows into savings and time deposits increase” ( the ratio of M1 to the sum of 12 months savings ).

  22. Gravatar of Spencer B Hall Spencer B Hall
    31. August 2020 at 07:59

    That’s why N-gDp targeting is money illusion. It will ultimately drive more savings into stagnant bank deposits. All you have to do is dissect Japan’s problem. The Japanese save more and keep more of their savings in their payment’s system.

    Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for Japan (IRLTLT01JPM15

    Inflation, consumer prices for Japan (FPCPITOTLZGJPN)

    Household Saving Rate in Japan increased to 62.10 percent in June from 24.60 percent in May of 2020.

  23. Gravatar of Gene Frenkle Gene Frenkle
    31. August 2020 at 08:54

    Spencer Hall, if you have no children and believe you will live to 90 wouldn’t one need more savings? So I believe Japan’s issues are due to demographics. So the parents of boomers had multiple children and believed they would die at 65 and the notion of saving for college for their children was a foreign concept because tuition was cheap. Plus housing was affordable so you didn’t have an insane mortgage undermining disposable income.

    With respect to reparations for descendants of slaves, for gen x whites that didn’t inherit wealth I would tell them first off paying reparations isn’t “punishment”…just like when Trump bailed out the coal miners pension fund with $10 billion he wasn’t punishing Americans that weren’t in that union. Reparations are a device to get more dollars into circulation creating demand. So I would liken it to a gold rush except the gold isn’t mined it just appears in certain people’s bank accounts. Furthermore we know who the big winners of a gold rush are—the suppliers like Levi Strauss and the pater familias of the Trump family. Second off—I would tell poor gen x and younger whites that we need a better social safety net but reparations are merely a stimulus to revive and reboot the economy and we need to get it done in 2021 and then we can move on to making college affordable again, and making housing affordable, and giving parents time off when they have a baby, and then funneling more money to parents of small children, etc.

  24. Gravatar of Nick S Nick S
    31. August 2020 at 17:55


    RE- “ The new Fed policy represents an implicit acknowledgement that the Fed erred during the Great Recession, and should have done enough stimulus to offset the deflation of 2009.”

    False. But what it does represent is the Fed’s knowledge that inflation will imminently become more apparent in the data. And the reason for this announcement is to provide further assurance to the market, that they will continue to inflate the bubble, even in the face of more visible inflation. This merely represents another moving of the goalpost… from price stability… to a 2% ceiling… to a 2% target… to “symmetrical inflation.” Fed is running out of bullets, especially with their supposed stance on a zero lower bound. That will change too, just a matter of time.

  25. Gravatar of ssumner ssumner
    31. August 2020 at 19:04

    Nick, Every single sentence in your comment is incorrect.

  26. Gravatar of Nick S Nick S
    31. August 2020 at 19:06

    Not to mention the fact that…

    “…since Bernanke imposes 2% core PCE target in January 2012, the Fed has managed to hit 2% ELEVEN TIMES IN 115 MONTHS.

    They can’t hit what’s not designed to be hit because of systematic understatement of cost of living.” -Danielle DiMartino Booth

    Now what Sumner? Let me guess… More cowbell?

    #NoMoreBullets #KickTheCanOffTheCliff

  27. Gravatar of Nick S Nick S
    31. August 2020 at 19:11

    You really just don’t get it Scott. You’re logic is…

    1.) when it rains, the sidewalks get wet
    2.) in order to make it rain, wet the sidewalks

    We obviously have our differences, but we both agree that RGDP cannot be stimulated by monetary policy in the long run… given this, why so much focus on NGDP? Who cares about NGDP? RGDP is what matters. I honestly want to hear a coherent answer on this.

  28. Gravatar of Postkey Postkey
    1. September 2020 at 00:11

    “The relationship between interest rates and economic activity/growth has not been systematically evaluated.
    High time to do it: In Lee and Werner, Ecological Economics, 2018, {
    https://www.sciencedirect.com/science/article/pii/S0921800916307510 }
    we present half a century of evidence on the correlation & statistical causation between interest rates and economic activity in the US, Japan, Germany and the UK (quarterly data). In Lee & Werner (2018b) we present broader cross-country evidence from 19 countries and considering 3 different types of interest rates, using higher frequency monthly data

    Conclusion: Concerning correlation, we found that despite allowing for 2 years of leads and lags, the hypothesis that interest rates are inversely correlated with economic growth is rejected in 8 out of 8 cases. Instead, we found that interest rates are positively correlated with economic growth in 8 of 8 cases.
    Negative correlation clearly rejected in all cases. Positive correlation supported in all cases

    (b) Statistical causation (Granger causality) between short-term and long-term interest rates on the one hand, and economic growth in the UK, US, Germany and Japan on the other: Conclusion: Causality from rates to growth rejected in 6 out of 8 cases. The alternative hypothesis that growth determines interest rates is supported in 8 out of 8 cases.

    Our empirical findings reject the canonical view that interest rates somehow affect economic growth in an inverse manner. To the contrary, long-term and short-term interest rates follow the trend of the business cycle, as measured by industrial production, in the same direction, in all countries examined.”

  29. Gravatar of Nick S Nick S
    1. September 2020 at 00:41

    Re: “ Our empirical findings reject the canonical view that interest rates somehow affect economic growth in an inverse manner“

    I agree with this, although the statement should have a period after “growth.” Interest rates, in a healthy economy not manipulated by central banks, are a function of economic growth/decline. They are simply another price.

    Although, Sumner will continue to chase his tail on this one, as he does on everything. Classic “economist” arguing that the dog wags its tail which implies that the tail wags the dog, leading to the dog wagging its tail…

  30. Gravatar of ssumner ssumner
    1. September 2020 at 08:42

    Nick, I actually agree with your final comment. If you want answers to other questions then start acting like an adult.

  31. Gravatar of Spencer B Hall Spencer B Hall
    2. September 2020 at 06:33

    Re: “So I believe Japan’s issues are due to demographics”

    As Jeffrey Snider posits: “Look at JAPAN — “Twenty-eight years in between, and nearly 10% shrunk. That’s not demographics; it cannot be population factors that account for all of the facts.”

    re: “for gen x whites that didn’t inherit wealth”

    My father was entirely on his own since he was 12 years old. My uncle, his brother went to an orphanage. My father was Alpha Omega Alpha in Med school, an Associate Dean, and on the Board of the American College of Sports Medicine. My uncle was President of the State Dental Association and CEO of Delta Dental.

    Or you could take Ben Carson and his older brother Curtis.

  32. Gravatar of Spencer B Hall Spencer B Hall
    2. September 2020 at 06:40

    (1) The 1966 Interest Rate Adjustment Act is prima facie evidence (lowered Reg. Q ceilings for just the commercial banks reversing the “credit crunch”).
    (2) The DIDMCA of March 31st is prima facie evidence (caused the 1985-1996 Savings and Loan Association Crisis)
    (3) The 1981 “time bomb” is prima facie evidence (produced 19.1% N-gNp in the 1st qtr. 1981, before reserve requirements were set)
    (4) The 2012 expiration of the FDIC’s unlimited transactions’ deposit insurance is prima facie evidence (responsible for the “taper tantrum”, in spite of the budget sequestration in 2013, the automatic spending cuts)
    (5) The introduction of the payment of interest on interbank demand deposits is prima facie evidence (resulted in the nonbanks shrinking by $6.2 trillion while the banks grew by $3.6 trillion, i.e., it destroyed the nonbanks who were rolling over short term repos to fund their earning assets)
    (6) The September 2019 Repo Crisis is prima facie evidence. To wit:

    Credit is the life blood of the economy. Savings flowing through the nonbanks increases the supply of loanable funds, but not the supply of money. And lending by the DFIs is inflationary. Lending by the NBFIs is noninflationary. The prosperity of the DFIs is dependent upon the prosperity of the NBFIs.

  33. Gravatar of Spencer B Hall Spencer B Hall
    2. September 2020 at 06:45

    The recent sharp decline in real interest rates is just a glimpse of things to come. An increase in infinite money products (QE-forever) decreases the real rate of interest and has a negative economic multiplier. Whereas an increase in finite savings products ($15 trillion are frozen) increases the real rate of interest and has a positive economic multiplier.

    The monetary transmission mechanism, distribution channel, for infinite money products (on asset prices) is different than for finite savings products (acting primarily through the interest rate channel).

  34. Gravatar of Postkey Postkey
    2. September 2020 at 07:14

    This ‘Thatcherite monetarist’ is ‘optimistic’ re Japan?
    “Japan – like the USA – may prove another fascinating test of different theories. Over the last 30 years it has had both the lowest rate of broad money growth in the world and the lowest rate of increase in nominal GDP. (For years the Bank of Japan has declared a 2% inflation target, and inflation has remained stubbornly beneath it. If 5% plus money growth [at an annual rate] now emerges, inflation of above 2% would be expected by a quantity-theory economist.) On 16th March the Bank of Japan announced that it would buy “aggressively” exchange-traded funds at an annual pace of around ¥12 trillion (about $110b.), double the amount previously planned. The budget deficit has also widened dramatically and – as elsewhere – will be financed to some extent from banks. An upturn in money growth has occurred, with the three-month annualised rate of increase to May reaching 15.7%, which is an extraordinary figure by Japanese standards. If Japan in the next few quarters hits and exceeds its 2% inflation target, this might persuade sceptics that inflation is indeed a monetary phenomenon and not a by-product of “national psychology” or some such nonsense. It might also persuade the far too numerous monetary economists who focus on the base and narrow money that an all-inclusive, broadly-defined aggregate is the one to watch.“

  35. Gravatar of Spencer B Hall Spencer B Hall
    2. September 2020 at 07:14

    #1 Gibson’s Paradox: “observation that lower prices were accompanied by a drop—rather than a rise—in interest rates”
    #2 Interest Rate Fallacy: “monetary policy is easy when interest rates are low and monetary policy is tight when interest rates are high”
    # 3 Paradox of Thrift: “The paradox states that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower total saving.”

    The “Paradox of Thrift’s” far-reaching impact is characterized savers reactions to absolute changes in interest rates, either up (yield chasing) or down (locking in yields).

    As Dr. Philip George points out:
    (1) “Holding interest rates down does nothing to boost investment because the problem is falling consumption.”
    (2) “When interest rates go up, flows into savings and time deposits increase.”
    (3) “The velocity of money is a function of interest rates”

  36. Gravatar of Spencer B Hall Spencer B Hall
    2. September 2020 at 07:19

    re: ” lowest rate of broad money growth”

    I.e., the lowest rate in the activization and application of savings products, near-money substitutes.

  37. Gravatar of Spencer B Hall Spencer B Hall
    2. September 2020 at 07:23

    The consequence of Japan’s experiment will result be: FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling?.

  38. Gravatar of Postkey Postkey
    2. September 2020 at 08:01

    “ . . . 20 years of artificial, central-bank induced recession and deflation were created in order to implement – structural reform (deregulation, liberalisation, privatisation) to weaken the performance of the Japanese economy – consolidation of the banking sector from 20 major city banks to 3 – power consolidation in the hands of fewer people – historic monetary reform by abolishing cash & bank credit creation, and introducing central bank digital currency as sole monetary instrument – a new forced “low growth” environment with accelerated robotization, mass layoffs and introduction of “universal basic income” via microchip implant This could never happen in Europe….?”


    ‘Princes of the Yen: Central Bank Truth Documentary’

  39. Gravatar of Gene Frenkle Gene Frenkle
    2. September 2020 at 09:09

    Spencer Hall, Ben Carson is a boomer and as the commenter that pointed out that 1971 is the year in which many trends began—so the racism that was pervasive in the 1960s would have been a major obstacle for African Americans to overcome when the trends that gave us our society today began in 1971.

    That said, I’m not in the UAW or the coal miners union but I didn’t feel like I was being punished when Obama and Trump threw billions at those groups. So to me descendants of slaves is a group worthy of throwing money at just like coal miners and the UAW.

  40. Gravatar of Spencer B Hall Spencer B Hall
    2. September 2020 at 12:52

    Re: “So to me descendants of slaves is a group worthy of throwing money at just like coal miners and the UAW.”

    Ask their black brothers in Africa to give them reparations, they sold them into slavery.

  41. Gravatar of Gene Frenkle Gene Frenkle
    2. September 2020 at 13:03

    So why couldn’t the people of West Virginia chip in to bail out the coal miners pension fund?? Why did Trump and Manchin use federal funds to bail out their obviously mismanaged pension fund?? When Obama bailed out the UAW and Trump bailed out the coal miners did that harm you?? Did you hold your breath and say you weren’t going to vote for Trump??

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