Rogoff on The Money Illusion

Kenneth Rogoff has a nice review of my new book in the Times Literary Supplement. Here’s an excerpt:

This thoughtful and broad-ranging critique of the post-financial crisis consensus on macroeconomic policy is worth reading for anyone interested in monetary policy, even if you don’t buy into the “market monetarism” (of which more later) championed by the author. Sumner is unafraid to challenge the academic consensus: in his earlier book on the Great Depression (The Midas Paradox, 2015), he argued that bad policy-making at every turn made things far worse in the late 1920s and early 1930s than they had to be. In The Money Illusion, much like Leonard in The Lords of Easy Money, he explores monetary policy decision-making during the 2008-09 financial crisis and its aftermath – but with more focus on the economics and less on the personalities. Some may wonder why anyone today would write (or read) a book raking over the financial crisis, when the world has moved on to dealing with the pandemic, war in Europe and how to manage economic policy in an era of wild political see-saws. In fact, Sumner’s book is of great significance to our current crises, and his challenge to conventional wisdom is bracing. . . .

Sumner’s book has all sorts of philosophical insights that will be interesting to anyone trying to understand markets and macroeconomics. One bogeyman he confronts is bubbles. Many market observers see speculative bubbles everywhere. Sumner, by contrast, argues that there is typically some rational factor behind the “bubble”, and the fact that the casual (or academic) observer isn’t easily detecting it is not a reason to dismiss signals from market prices. After all, the biggest bubble of the past forty years, if you want to call it that, is the collapse of interest rates, particularly “real” interest rates (the interest rate adjusted to remove the effects of inflation). Low real interest rates make virtually any kind of long-lived real asset seem more valuable, from housing to art to stocks to cryptocurrency.

Rogoff also reviews The Lords of Easy Money: How the Federal Reserve broke the economy by Christopher Leonard. Read the whole thing.

Many economists (including Rogoff) are now at least somewhat supportive of NGDP targeting. Today, I view my biggest challenge as convincing other economists that monetary policy remains highly effective at the zero bound. (Rogoff is skeptical, at least in an economy with cash.) My current project addresses that issue.

HT: David Gordon, Tyler Cowen



22 Responses to “Rogoff on The Money Illusion”

  1. Gravatar of agrippa postumus agrippa postumus
    29. June 2022 at 15:40

    economist manque sumner’s bete noir is the “bubble” he sees that no one should see

  2. Gravatar of Kevin Erdmann Kevin Erdmann
    29. June 2022 at 16:23

    From the Rogoff article:
    “That said, I did not, in the earlier crisis – and still do not – think it made sense to save every major bank, no matter how irresponsible their policies. It would have been better to have put at least one into receivership, which would not only have reduced moral hazard, but given the public a sense that there had been a modicum of social justice for the problems the banks had created.”

    First, it doesn’t really seem accurate to describe it this way. Shareholders of several major financial institutions were effectively wiped out.

    But, further, this seems to me to be maybe the most important lesson yet to be widely appreciated from the GFC. If the central bank has model error, and they might be creating a contraction without knowing it, “moral hazard” concerns are a recipe for crisis. If your book even created a small probability in Rogoff’s mind that it was the Fed that had erred, I think he needs to reassess his commitment to the anti-moral hazard approach, which leads to such a horrible outcome that surely even a small probability of Fed model risk leading to pro-cyclical policy choices would be cause for avoiding it.

  3. Gravatar of TallDave TallDave
    29. June 2022 at 16:35

    yep pretty sure you’ve won and NGPDLT is mostly already here

    Fed’s soon going to be looking very hard at NGPD as it gets caught between falling employment and rising prices

  4. Gravatar of ssumner ssumner
    29. June 2022 at 19:17

    Kevin, I’m all for getting rid of moral hazard, but it wasn’t the banks that created the crisis in late 2008, it was the Fed.

  5. Gravatar of Kevin Erdmann Kevin Erdmann
    29. June 2022 at 20:28

    Well, that’s my point. If the banks mainly need to be saved from the Fed, then the Fed having a generalized apprehension about saving banks on moral hazard grounds leads to the potential for terrible pro-cyclical policy choices. It doesn’t seem like he’s fully considered the lessons of your book.

  6. Gravatar of Todd Kreider Todd Kreider
    30. June 2022 at 03:47

    Speaking of Rogoff, whatever happened to his 2012 prediction that Japan would have a financial crisis by 2020? He was sure of this happening.

  7. Gravatar of D.O. D.O.
    30. June 2022 at 04:40

    It does seem that Prof. Sumners believes in at least in one bubble — higher than trend NGDP.

  8. Gravatar of Kester Pembroke Kester Pembroke
    30. June 2022 at 06:02

    If you want to blow their minds tell them that we’d be better off just asking people to wait a week before buying anything than increasing interest rates.

  9. Gravatar of ssumner ssumner
    30. June 2022 at 08:04

    D.O., That’s not a bubble.

  10. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. June 2022 at 08:23

    OECD Nominal GDP forecast:,the%20economic%20climate%20in%20individual%20countries%20and%20

    Still a little high in 2022.

  11. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. June 2022 at 08:28

    Latest GDPnow estimate: -1.0 percent — June 30, 2022

    The problem arises because short-term money flows (proxy for real output) is impacted more so, or sooner, than longer-term money flows (proxy for inflation). So, if the FED decreases Vt (raises interest rates), then R-gDp falls relative to inflation. Inflationary pressures require a sustained tightening of monetary policy for > 2 years.

  12. Gravatar of Gene Frenkle Gene Frenkle
    30. June 2022 at 11:39

    I still believe the fact American natural gas production and global production plateaued in the face of ever increasing prices is very important to understanding the 2001-2009 economy.

  13. Gravatar of Gene Frenkle Gene Frenkle
    30. June 2022 at 11:39

    ^^should be “global oil production”

  14. Gravatar of Gene Frenkle Gene Frenkle
    30. June 2022 at 12:01

    So why does global oil production and American natural gas production play such a big factor in the 2001-2009 economy?? Because ever increasing energy prices were a major factor in driving Main Street’s behavior. So that is why the best investors were passing on cheap credit because they had a good reason!! And because capital searches for yield the cheap credit ended up with the worst investors—house flippers and Subway franchisees and student loans for worthless graduate degrees.

  15. Gravatar of Jeff Jeff
    2. July 2022 at 00:24

    The idea that the Fed somehow betrayed the banks in 2008 seems overblown. Is 0.4% deflation really that bad? If your bank can’t weather that then you are taking a chance that you will get liquidated. Is that really something that should concern policymakers?

    Also, that deflation was transitory. If mild transitory inflation isn’t bad, what is wrong with mild transitory deflation?

    “Social justice” for most people is not the kind of show trial or scapegoating that Rogoff imagines. It’s just money being scarce enough that it has value commensurate with what they think they are getting when they surrender their time (& often physical safety as well) in exchange for wages. There is just no way people can make good economic decisions when the value of money (measured in consumer prices, asset prices, or money supply) is wildly changing from year to year, when there is no way to safely store your earnings without losing that value over time, and when there is widespread suspicion that the issuance of money is being constantly manipulated for political ends.

  16. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    2. July 2022 at 07:24

    re: “that deflation was transitory”

    No, it’s permanent. It exacerbated secular stagnation (the velocity of circulation). What do you think QE1, QE2, and QE3 were about? The remuneration of IBDDs destroyed the investment banks wholesale funding (much of which was with maturities under 30 days). Bernanke bankrupt half the home builders, creating a housing shortage, forcing home prices to unaffordable heights.

    The FED will cause an economic depression. It has reversed the savings / investment process. The economic engine is being run in reverse. Contrary to the FED’s research staff, deposits are the result of lending and not the other way around.

    The elimination of Reg. Q ceilings was a ruse. Savings flowing through the nonbanks never leaves the commercial banking system as anyone who has applied double entry bookkeeping on a national scale should know. The NBFIs are the DFI’s customers.

    Powell deemphasized the role of money in the economy. This is also a ruse. To coverup his ruse Powell has destroyed deposit classifications. Powell eliminated the 6 withdrawal restrictions on savings accounts, which isolated money intended for spending, from the money held as savings. The FED can’t target N-gDp using interest rate manipulation.

  17. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    2. July 2022 at 07:42

    See: R. Alton Gilbert (who wrote – “Requiem for Regulation Q: What It Did and Why It Passed Away”), in his letter back to me on December 11, 1978:

    “Such savings are invested in many ways, including deposits at commercial banks.”

    See e-mail – : My comment: Savings are not a source of “financing” for the commercial bankers
    Dan Thornton
    Thu 3/9, 2:47 PMYou
    See the graph below.
    Daniel L. Thornton
    D.L. Thornton Economics LLC

    And large CDs aren’t even included in M2 (as in FOMC’s proviso “bank credit proxy” which used to be included in the FOMC’s directive during the period Sept 66 – Sept 69).

    Or take George Selgin (advisor to Congress): July 20, 2017
    “This is nonsense, Spencer. It amounts to saying that there is no such things as ‘financial intermediation,’ for what you claim never happens is precisely what that expression refers to.”

    From a system’s perspective, commercial banks (DFIs), as contrasted to financial intermediaries (non-banks, NBFIs): never loan out, and can’t loan out, existing deposits in any deposit classification (saved or otherwise)(saved or otherwise) including existing transaction deposits, or time “savings” deposits, or the owner’s equity, or any liability item.

    Commercial banks acquire earning assets through the creation of new money. When commercial banks make loans to, or buy securities from, the nonbank public -new money, demand deposits, are created — somewhere in the commercial banking system.

    The non-bank public includes every institution (including shadow-banks), the U.S. Treasury, the U.S. Government, State, and other Governmental Jurisdictions, and every person, etc., except the commercial and any of the District Reserve banks.

  18. Gravatar of ssumner ssumner
    2. July 2022 at 08:38

    Jeff, “Is 0.4% deflation really that bad?”

    Never reason from a price change.

  19. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    2. July 2022 at 09:17

    Effective June 15, 2022

    “An RRP is a liability on the Federal Reserve’s balance sheet, like reserves, currency in circulation and the Treasury’s General Account. When RRP transactions are settled, the New York Fed’s triparty agent transfers the cash proceeds received from RRP counterparties to the New York Fed. This movement of funds from the clearing bank to the New York Fed reduces bank reserve liabilities on the Federal Reserve’s balance sheet,”

    “The bond underlying the repo transaction is still recorded on the Fed balance sheet”

    “Of course, if the buyer of a reverse repo or a security sold by the Fed is a nonbank and pays for the purchase using its bank account, the money supply is directly affected.” And 90% are purchased by nonbanks.

    I.e., the FED has been tightening credit for a long time – 2,466,420.

  20. Gravatar of Thomas Hutcheson Thomas Hutcheson
    3. July 2022 at 11:49

    ‘Today, I view my biggest challenge as convincing other economists that monetary policy remains highly effective at the zero bound.’

    I can’t see any reason why it should not be, but as you do I hope you will explore different policies, especially the contrast of the dual mandate in which the “prices” side is interpreted as a stable inflation rate vs NGDP targeting and what explicit or implicit inflation rate is optimal in both.

  21. Gravatar of Matthias Matthias
    3. July 2022 at 20:47

    Scott, a slight tangent:

    Even if short term negative nominal interest rates were bad or ineffective, why is that seen as such a problem?

    The Central bank could always buy longer dated assets, couldn’t they? In the limit of perpetual bonds, any positive price for them implied a positive long term interest rate, doesn’t it?

    (There might be some reasons for central banks to prefer shorted dated assets. But whatever bad things are supposed to come from negative nominal interest rates can’t be worse than those from buying longer duration assets; otherwise they’d just do that, no?)

  22. Gravatar of ssumner ssumner
    4. July 2022 at 08:37

    Thomas, Good points.

    Matthias, I think the costs of both policies is greatly overrated.

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