A Benjamin Cole post
Paul Krugman may be persona non grata in my house, but I must begrudgingly admit when the NYT blogger makes a good point:
“Let me also add that if it’s really that easy for monetary errors to endanger financial stability—if a deviation from perfection so small that it leaves no mark on the inflation rate is nonetheless enough to produce the second-worst financial crisis in history—this is an overwhelming argument for draconian bank regulation. Modest monetary mistakes will happen, so if you believe that these mistakes caused the global financial crisis you must surely believe that we need to do whatever it takes to make the system less fragile. Strange to say, however, I don’t seem to be hearing that from (John) Taylor or anyone else in that camp.”—Paul Krugman.
Krugman plays a little fast and loose here, and also ignores University of Chicago scholar John Cochrane, who has in fact called for major reforms, such as bank lending 100% backed by equity. No more 30-to-one leverage.
And inflation did sag after 2008, indicating monetary policy was too tight, as Market Monetarists have said. There was a “mark on the inflation rate,” such as Western economies sinking into deflation. I noticed that mark.
Still, Krugman has a point. We keep hearing monetary policy is too loose, and have heard that for 30 years. Yet the developed world is in deflation or close, led by Japan. Then we had a global financial collapse.
So, the record suggests the inflation-hysterics have it exactly backwards. If monetary policy has threatened financial stability, it has been because it has been too tight. We are in ZLB now—that is not a sign of decades of easy money.
Krugman has a point about banks, too. How is it in the U.S. we have such a feeble financial system? Why has the right-wing no interest in measures that would create strong banks? Being “against Dodd-Frank” is not a policy. If Dodd-Frank is no good, then embrace John Cochrane, or please devise a policy that would make for strong banks.
And, as I always say, print more money.
Because, not printing more money will have unintended and unforeseeable but catastrophic consequences on financial stability. Well, you can take out the word not, but the insanity level remains unchanged.
Great post Mr. Cole
I am a very conservative person in economic subjects (I favor zero inflation as opposed to 2%, for example), but your logic is very difficult to counter. I actually wrote a newspaper article in 2008, late october, suggesting that monetary policy was too tight given the amount of de-leveraging banks would go through moving forward. And the fact is the subsequent events on regulatory issues (Dodd-Frank and Basle III regulations) put more pressure on the banks balance sheets, in my view, in terms of advocating further de leverage. I call this period a period of “regulatory tightening”. Therefore, if one wanted to keep AD in the previous path, one should definitely have printed more money, to make up for the counter effect bank deleveraging had.
Mr. Robazzi! As always thanks for reading.
In a perfect world, perhaps zero inflation. But here on Earth….
You will like my next post. Pro-supply side!