Is market monetarism going viral?

I don’t know about you, but I’m seeing a surge in market monetarist ideas on the internet.

One of our most famous claims is that tight money caused the recession, not a collapsing housing market.  I’ve often pointed to the fact that the unemployment rate showed almost no change during the great 27 month housing crash of January 2006 to April 2008.  Now Matt Yglesias and Evan Soltas are making similar arguments.  Both have excellent graphs that make the argument even stronger.

PS.  Some commenters point to the fact that the unemployment rate misses the return of illegal Mexican construction workers back to Mexico.  I have two replies:

1.  It’s still true that the housing crash did not cause the big rise in our unemployment rate that began in late 2008.

2.  Evan’s graph shows real GDP continued growing, and that is a variable that should have picked up the decline in construction done by illegal workers.


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23 Responses to “Is market monetarism going viral?”

  1. Gravatar of JSeydl JSeydl
    9. August 2012 at 07:33

    Here we go again. Still no response to the fact that it’s hard to find offsetting mechanisms in late-2008.

    RI was going down; we had an $8 trillion housing bubble. Investment in structures was also going down; there was a smaller bubble in the CRE market, ya know. PCE was going down; if the value of one’s home drops by 50%, why would that person not cut spending?

    The offsetting mechanism, then, would have had to have been some combination of I, G, and Nx. The correlation between I & C is very high, so w/o C we don’t get I. Nx is tough to get when the dollar is the principle reserve currency and has flight-to-safety qualities. If G is the offsetting mechanism, then we’re in a Keynesian world that has nothing to do w/ NGDPLT.

  2. Gravatar of RPLong RPLong
    9. August 2012 at 07:46

    Never reason from a blog content change.

  3. Gravatar of Major_Freedom Major_Freedom
    9. August 2012 at 08:41

    One of our most famous claims is that tight money caused the recession, not a collapsing housing market.

    Keynesians and other inflationists have been claiming that since the 1930s.

    Classical economists have been claiming that since the 18th and 19th centuries (Which JB Say refuted).

    It is an age old superstition that arises on the basis of committing the fallacy of composition, namely, of attributing what is true for one businessman (“lack of demand for X leads to the individual seller of X going bankrupt with layoffs”), to the economy as a whole (“lack of aggregate demand for Y leads to aggregate bankruptcy with aggregate layoffs”).

    It just seems so plausible, doesn’t it? This misunderstanding is due to not thinking beyond the immediate moment nor beyond one’s immediate circumstances. When you think narrowly, then you will have narrow answers for “the economy”.

    For the economy as a whole, it is NOT true that there can be a general overproduction of goods without a corresponding demand for them. The reason for this is because the desires for additional wealth is practically limitless. Even if we consider ascetics, monks, and other individuals who seem to not want more wealth, they too tend to want more wealth in the form of whatever physical goods are needed to accept more participants into their way of life, for example more temples, more clothes, more writing utensils, more paper, more sandles, etc.

    Full satisfaction of wealth has not yet been attained in over 200,000 years of human existence, and it almost certainly won’t occur for another 200,000 years. As much as humans can contemplate the cosmos, there will be desires to reach the farthest depths of space.

    Humans could only ever produce too much of some things and not enough of other things. Too much salt and not enough french fries, or too many tires and not enough car frames, or too many houses and not enough mining companies, and so on.

    Partial relative overproduction may LOOK like a general overproduction, but it isn’t. I can’t answer for others, but I do not hold that the recession was caused by the housing bubble and subsequent collapse. I hold that the recession was caused by the same thing that caused the housing bubble. The housing bubble was but one manifestation of the thing that caused the recession.

    I’ve often pointed to the fact that the unemployment rate showed almost no change during the great 27 month housing crash of January 2006 to April 2008.

    …but you do not point to the fact that the rate of employment growth was decreasing from 2004 to the beginning of 2008, and that employment started to fall at the beginning of 2008, months prior to the NGDP collapse of late 2008.

    You can’t claim to know that it was the fall in NGDP that caused the fall in employment. Wages aren’t even paid out of aggregate demand. Aggregate demand is in part a function of spending out of wages. It is more “reasonable” to conclude that a decline in wage payments would put downward pressure on NGDP, than to believe that a fall in NGDP puts downward pressure on wages.

    It is no answer to believe “The Fed did not print enough money as people hoarded more and more cash, that’s what caused the recession”. For you have to answer WHY people were hoarding more and more money that made NGDP decline! Was the Fed burning money? Were they taxing people’s account balances?

    Market monetarists are just taking the decline in NGDP for granted as an inexplicable phenomenon of market economies. Not once has there been any discussion of why people would suddenly reduce their spending despite the fact that the Fed was taking their money.

    It is not surprising to those of us who ask these questions that market monetarists believe the only solution in such a world is for there to be a non-market entity to “solve the market problem of not enough aggregate spending”.

    In a free market of money production, if people suddenly decide to hoard money (why would they anyway?), then is it a guarantee that those who produce money will produce enough such that overall spending will keep growing, or at least remain unchanged? If not, then in a peaceful world, where individuals respected each other property rights, where there is no initiations of force against other people, nor theft of their property, then it follows that NGDP changing is OPTIMAL as it stands in relation to individual subjective preferences. People want to hold more money, and those who produce money don’t want to produce more money that would result in unchanged aggregate spending!

    If everyone gets what they want CONSTRAINED by the wants of everyone else, then that is optimal, despite the fact that unemployment temporarily rose, despite the fact that output temporarily fell, despite the fact that NGDP fell! This is all optimal and perfectly in line with individual preferences, rather than just the special group preferences of workers, or the sellers who experience the brunt of the fall in spending, or the holders of debt whose incomes grow via inflation, or the ivory tower economists who hate the fact that they are not in control of the economy and would have their personal utility increased by knowing their ideas are being used by the coercive monopolist.

    Of course, such a peaceful world of individual liberty does not exist, but neither does a rape free or murder free world exist. Yet we can still deduce that what takes place in a rape and murder free world would be superior to what takes place in a rape and murder filled world, ceteris paribus. We can do this by recognizing every individual’s preferences as they stand in relation to every other individual’s preferences, and we can know that with rape and murder, since one party gains at the expense of another, such behaviors are not mutually gainful and thus sub-optimal.

    The same thing applies to an otherwise peaceful world with private money production. If in such a world there arises violent thugs who centralize and monopolize money production into the hands of a single entity, then it will create gains to those who monopolize and those who initially benefit from the inflation, but those gains will come at the expense of those who are victimized by such violence. So even if such a violent world had a rigid NGDP, it would not represent OVERALL gains to individuals. It would only represent gains to some at the expense of others, and in the long run, at the expense of everybody.

  4. Gravatar of Major_Freedom Major_Freedom
    9. August 2012 at 08:44

    Typo:

    “Not once has there been any discussion of why people would suddenly reduce their spending despite the fact that the Fed was not taking their money.”

  5. Gravatar of ThomasL ThomasL
    9. August 2012 at 08:54

    @JSeydl, @Major_Freedom

    +1

  6. Gravatar of Cameron DeHart Cameron DeHart
    9. August 2012 at 09:21

    I’m not sure I understand. So, the housing collapse didn’t cause unemployment to go up, the Fed’s failure to counter the negative financial and economic effects of the housing collapse did?

    That’s comparable to saying that if I hit you in the chest with my fist, I didn’t “punch you”, your hand failed to block my fist.

  7. Gravatar of ChacoKevy ChacoKevy
    9. August 2012 at 09:21

    I think I need some education, so pardon my ignorance. My understanding of the “housing story” as cause of the recession was not in housing starts and construction themselves, but of the financing gimmicks that ballooned them. Assuming the bubble in construction started at the same time as the rise in “liar loans”, 2003, then the 5-year ARMs that would reset at interest rates homeowners wouldn’t be able to afford, then the housing crash was in 2008, when many of the mortgage-backed securities proved to have been garbage to investors.

  8. Gravatar of ssumner ssumner
    9. August 2012 at 09:25

    New readers should google my National Affairs article for a fuller explanation.

  9. Gravatar of Greg Ransom Greg Ransom
    9. August 2012 at 09:46

    You are still misrepresenting, misunderstanding, misreporting & concealing the data on all this Scott.

    Ie you aren’t at all persuasive to anyone who knows the material.

    So your aim must be to fool the ignorant.

  10. Gravatar of Brito Brito
    9. August 2012 at 09:49

    “1. It’s still true that the housing crash did not cause the big rise in our unemployment rate that began in late 2008.”

    Again after reading this blog for 4 or so years I still haven’t seen a convincing explanation, especially not one that trumps the following: decline in house prices -> decline in asset values, especially mortgage backed securities & related assets -> financial crisis -> credit crunch & severe lack of lending & credit availability as a result -> decline in spending/output. None of this implies that a decline in house prices must cause a simultaneous decline in output as this could all happen at a lag, it also doesn’t imply that a recession can start only as soon as the financial crisis starts, since a more lightweight recession could occur earlier before being exacerbated by the crisis.

  11. Gravatar of Greg Ransom Greg Ransom
    9. August 2012 at 09:54

    1. Almost HALF of all long-term unemployed have been construction workers.

    2. The malinvestment causal mechanism involves ALL relative prices and ALL sectors of the economy.

    3. You’ve consistently misreported & misunderstood & falsely analyzed the housing data.

    4. Housing is intimately tied to all different sectors and parts of the economy.

    5. Transportation is just ONE other sector that was involved in the disequilibrium twisting of production and relative prices.

    6. You haven’t come close to having shown that massive after-the-fact inflation years after the collapse of an artificial malinvestment & shadow money boom can instantly re-coordinate the economy in a sustainable fashion.

    Etc., etc., etc.

    In other words, you got a long way to go to engage the rival you a constantly constructing as a fraudulent strawman — a straw man which shows both theoretical incompetence re the explanatory rival & empirical shallowness, unreliability & irrelevance in terms of what is at issue.

  12. Gravatar of JSeydl JSeydl
    9. August 2012 at 10:10

    I’m with Greg Ransom. Nowhere in your National Affairs article is the adjustment mechanism in late-2008 properly explained, Scott. The only thing you say is:

    “It becomes much easier to say we will not bail out General Motors if we have a monetary policy that assures that the failure of GM will not reduce aggregate spending, but will instead result in resources being re-allocated to other parts of the economy. It is easier to shed jobs in declining sectors if jobs are being created just as rapidly in booming sectors.”

    In other words, you’re still just asserting that the decline in AD from the housing crash will be offset under NGDPLT without explaining how or why.

    It’s a shame because I really like NGDPLT. I think it would have lessened 8 of the last 10 recessions. But recessions from asset busts are inherently different. Asset bubbles lead to over investment, and if the over investment is as widespread across the economy as it was in the 2000s, the adjustment mechanism from monetary policy will get screwed up. This is why NGDPLT is not enough; we need central bankers to be on the lookout for asset bubbles, too.

  13. Gravatar of UGGG69 UGGG69
    9. August 2012 at 11:06

    Cullen Roche has a convincing view contra the Yglesias and Soltas arguments.

    http://pragcap.com/housing-recession-and-myth-making

  14. Gravatar of Becky Hargrove Becky Hargrove
    9. August 2012 at 11:39

    JSedyl,

    “…we need central bankers to be on the lookout for asset bubbles too.” But isn’t that asking central bankers to take on more central planning functions? A bubble such as housing happens because too many economic actors have too much to gain from all housing being as large and impractical as possible. The best thing anyone can do in the future to prevent housing bubbles is to make housing more affordable, mobile and flexible for all kinds of consumers, who now don’t even want to live where much of our housing stock was built. One only hopes the (more) desirable cities that don’t want more permanent residents can find ways to provide flexible housing on a smaller scale, at least for people who want to live in cities while they are young. However, such potential supply side solution are not Bernanke’s responsibility. When people become more reasonable about what they offer one another in terms of supply and demand, especially in the truly outrageous non-tradable sectors of our time, the job of monetary policy will become much easier, just as it should be. The very fact that Bernanke is casting about for potential supply side solutions that others should be working on now is truly a shame.

  15. Gravatar of Mike Sax Mike Sax
    9. August 2012 at 11:41

    “I’ve often pointed to the fact that the unemployment rate showed almost no change during the great 27 month housing crash of January 2006 to April 2008.”

    What I notice, though is there were plenty of indicators prior to the NGDP crash at the end of 2008 that the real economy was in trouble.

    To the extent that you believe the market is a foreward indicator, it had already started predicitng a recession at the end of 2007.

    The market had peaked in July, 2007. You can trace the 18 month bear market to the day. It was the day in late July that CountryWide Financial’s Angelo Mozillo gave that press conference in late July and said he didn’t see the housing market coming back for two years-at the time that meant 2009.

    This totally spooked the markets which dropped the next day 400 points.

    The market then dropped 1000 points in August. In September the Fed cut rates and this enabled it to rally in October and retrace the July pre-Mozillo highs. But we never got higher than that and in November the market started the long road down.

    So it was pretty clear if you were a particpant in the equites market back in 2007 that trouble was ahead long before NGDP collapsed.

  16. Gravatar of Jim Glass Jim Glass
    9. August 2012 at 11:54

    Here we go again. Still no response to the fact that it’s hard to find offsetting mechanisms in late-2008 … The offsetting mechanism, then, would have had to have been some combination of I, G, and Nx…

    In July 2008 deflation started and accelerated to a 13% annual rate in the 4th Q, the worst deflationary plunge since the collapse days of the Great Depression.

    If double-digit deflation isn’t a sign of excessively tight money, what is? What’s the mechanism that produces double-digit inflation?

    When double-digit deflation strikes the economy across-the-board, what is the effect on businesses and the banking system via the sudden unexpected increase in real interest rates (multiplied by all that leverage), real fixed costs, real salary costs … (hint: 1930).

    Is the Fed capable of avoiding double-digit deflation through monetary policy if it is on its game? (It certainly ended it quickly enough with QE1.) Is that perhaps even the Fed’s job (as double-digit deflation doesn’t jibe very well with its mandate to maintain price stability)?

    Think about it this way: If money *had* became excessively tight in the second half of 2008, what do you think would have happened?

  17. Gravatar of Major_Freedom Major_Freedom
    9. August 2012 at 12:03

    UGGG69:

    Cullen Roche has a convincing view contra the Yglesias and Soltas arguments.

    FTA:

    “First housing, then commercial, then financials, then consumer discretionary, etc. The balance sheet deterioration was not an event. It was a process that slowly filtered through the economy like a horrible virus. And as the consumer’s largest asset and the most economically important component of the debt markets began to decline in value balance sheets all over the place were impacted. And as the snowball picked up momentum the damage increased. The fact that it fell off a cliff in 2008 doesn’t mean it wasn’t rolling for years before that….”

    This is the point that is going over the heads of market monetarists. They want everyone to believe it was sunshine and lollipops until NGDP fell. They are stuck in rigid concepts like aggregate demand and fail to understand the market process over time.

  18. Gravatar of Major_Freedom Major_Freedom
    9. August 2012 at 12:14

    Jim Glass:

    In July 2008 deflation started and accelerated to a 13% annual rate in the 4th Q

    If double-digit deflation isn’t a sign of excessively tight money, what is?

    What about the previous excessively loose money? Are we just supposed to ignore all that, and start at a recent local peak of prices to judge monetary policy? That is cherry picking.

    You are not taking into account that prices were rising by over 5% by June 2008. Isn’t it more reasonable to start prior to that, so that we can see the long term trend? Since 2000, price inflation has been 2.4% Why start at June 2008 at an inflation peak? Anyone can start at a local peak or trough and then say “money has been way too loose the last month!” or “money has been way too tight the last week!”

    Long term, the Fed’s inflation target is ON target. You can’t focus on the short term. It is like climate change deniers focusing on the last year and saying “It got cooler!”, while ignoring the long term trend.

    When double-digit deflation strikes the economy across-the-board, what is the effect on businesses and the banking system via the sudden unexpected increase in real interest rates (multiplied by all that leverage), real fixed costs, real salary costs … (hint: 1930).

    When double digit money supply inflation strikes the economy across the board, what is the effect on businesses and the banking system via the sudden unexpected decrease in real interest rates (multiplied by all that credit), real fixed costs, real salary costs … (hint: 2000s)

    Think about it this way: If money *had* became excessively tight in the second half of 2008, what do you think would have happened?

    Think about it this way: If money *hadn’t* became excessively loose in the first half of the 2000s, what do you think would have happened?

  19. Gravatar of Britmouse Britmouse
    9. August 2012 at 12:16

    In the UK, today everybody thinks that a deterioration of export demand confirms the case for more deficit spending.

    Who will save us from ourselves?

  20. Gravatar of Saturos Saturos
    9. August 2012 at 18:59

    Scott, you’ll have no idea what “viral” is until you join Twitter. (Or start putting more stuff on YouTube).

  21. Gravatar of JSeydl JSeydl
    9. August 2012 at 19:03

    Becky,

    I’m not arguing for central planning. I’m simply arguing for competent central bankers. If Greenspan had come out publically and talked about the housing bubble in 2003-04, then the bubble would have deflated before getting to dangerous levels. But the records now show that Greenspan and Co. were more concerned about the non-inflation then.

    If I really had my way, I’d also love for central bankers to be on the lookout for trade imbalances (http://www.jseydl.com/money-has-been-too-tight-since-the-early-2000s/), but, realistically, that will never happen.

  22. Gravatar of RebelEconomist RebelEconomist
    10. August 2012 at 01:28

    JSeydl / Becky

    As someone who was involved at the time, I would say that it’s not that central bankers are not on the lookout for bubbles (or trade imbalances); it’s that they do not want to see them. The public and politicians enjoy bubbles, with the result that few senior central bankers want to make themselves unpopular, even by giving unequivocal warnings (recall that what Greenspan actually said was “HOW DO WE KNOW when irrational exuberance has unduly escalated asset values…”), let alone taking restraining action. And, if you want to get on in a central bank, you do not make these senior central bankers uncomfortable by constantly presenting them with information and arguments that expose the weakness of their public position.

    Given the political difficulty for central bankers in reacting to asset price changes per se, my own preference would be for them to target an inflation index that includes asset prices, which mandates central bankers to at least mitigate bubbles.

  23. Gravatar of TallDave TallDave
    14. August 2012 at 09:13

    Great news!

    I’ve been considering giving a small presentation to our local Tea Party chapter. Perhaps we here can develop a “Market Monetarism Basics” powerpoint for more effective promulgation.

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