The real problem is a nominal problem – also in 2016
In 2009 Scott Sumner wrote an article – The Real Problem was Nominal – in which he explained – was later became known as the Market Monetarist explanation for the causes of Great Recession. The Market Monetarist explanation for the Great Recession is that the Federal Reserve (and other central banks around the world) allowed monetary conditions to become far too tight in 2008 and that the crisis was not caused by a banking crisis, but rather that the banking crisis was a consequence of the extreme tightening of monetary conditions during particularly the summer of 2008. Hence, the Fed and other central banks gravely misdiagnosed the problem and as a consequence applied the wrong medicine for the problem. Furthermore, by focusing on nominal interest rates central bankers were led to believe that monetary conditions were very easy, while they in fact monetary policy became extremely tight during the second half of 2008. This explanation for the crisis is not yet commonly accepted but more and more economists now acknowledge that particularly the Federal Reserve failed greatly in 2008 as it failed to response appropriately to the spike in dollar demand. Unfortunately, I fear that the Federal Reserve today are in the midst of repeating the mistakes of 2008. Hence, the Fed continues to argue that monetary conditions are very accommodative, while in fact monetary policy has become increasingly tight over the past two years and particularly in recent months we have seen a significantly tightening of US (and global) monetary conditions. To illustrate this lets, look at six indicators Scott highlighted in his 2009 article to show that US monetary conditions became insanely tightening in 2008:
- Real interest rates soared much higher.
- Inflation expectations fell sharply, and by October were negative.
- Stock markets crashed.
- Commodity prices fell precipitously
- Beginning in August, industrial production plunged.
- The dollar soared in value against the euro.
Central bankers misdiagnosed the problem, they were not able to come up with an effective policy response. It was as if a doctor prescribed medicine for a common cold to someone whose illness had progressed to pneumonia. And because economists were confused by the nature of the problem, it appeared as if modern macro offered no solutions. Thus policymakers turned in desperation to old-fashioned Keynesian fiscal stimulus, an idea that had been almost totally discredited by the 1980s.I so hope that the Fed has learned a lesson from 2008, but I fear the worst. PS if you wonder what I think the Fed should do then you should read this recent blog post of mine. —- If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: email@example.com or firstname.lastname@example.org.