Market Monetarism gets an airing

From Timothy Lee: “Why printing more money could have stopped the Great Recession

For the last five years, economists and policymakers have been debating what caused the Great Recession and what America should do to recover from it. Liberals argued that massive deficit spending was needed to boost demand and pull America out of its economic slump. Conservatives have countered that too much government spending and regulation was to blame for the crisis in the first place, and that spending cuts and deregulation were the key to getting the economy going again.

In recent years, a third perspective has been gaining ground. Known as market monetarism, it holds that the Great Recession happened because America’s central bank, the Federal Reserve, didn’t do enough to support the economy in the wake of the 2008 financial crisis. And it argues that Fed has had the power to accelerate growth and bring down unemployment all along. It just needed to create more money.

What’s the future of market monetarist ideas?

Sumner says he’s optimistic that people inside the Federal Reserve have learned the right lessons from the Great Recession.

“Even though I don’t think the Fed has learned everything they could have learned from [the 2008 crisis], I think they’ve learned something,” Sumner says. “In recent years, they’ve started to move a little bit in the direction of what the market monetarists like myself have been talking about in terms of doing more QE, doing more forward guidance. It suggests to me that they realize now that they weren’t aggressive enough in 2008-9.”

In the long run, the success of market monetarism depends on developing a following among younger economists. And economists in their 20s and 30s have proven receptive to Sumner’s ideas. Sumner says the middle-aged economists who are running the Fed today came of age during the high-inflation 1970s, and as a result they’re still obsessed with fighting inflation — even though inflation hasn’t been a serious problem in decades.

Younger people, are forming their views now, in the midst of the worst economic slump in generations. They’re likely to be more receptive to Sumner’s argument that the Fed should have done more.

Scott´s interview

Some illustrations can be found here and here. For the Eurozone here.

HT David Levey

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