Scott Sumner and his market monetarist buddies have made a name for themselves. All the way back to articles on Business Insider, mostly written by Joe Weisenthal, they have maintained that the Fed was too tight in late 2007, leading to the Great Recession. They say that the cause of the Great Recession was tight money, including Interest On Reserves, IOR paid to keep banks from lending.
Now, please note, they do not deny a housing recession. But they say what happened was much deeper than that. The argument is compelling. They are opposed by Keynesians, Mish Shedlock, and Mises (Austrian economists). Please bear with me as I attempt to sort this out for you.
This accusation of tightening on the part of the Fed has become a hot economic topic because of Ted Cruz’s comments about the Fed showing a disposition to tighten prior to the deep crash in 2008. Mises would not accept this and says that blowing the bubble in the first place was the real evil of the Fed.
That has some truth to it as well, because many, including myself, believe that the Fed did misprice risk of the faulty MBSs in order to allow them to be used as collateral in the money markets. They broke one money market and were exposed after that. Confidence in the markets was damaged by the bubble and crash of MBSs.
But Mises and the Austrians say that easy money was the fault, while the monetarists say tight money after the crash began was at fault. Sumner and his friends have an agenda to print more money, but some of what they say makes perfect sense. Benjamin Cole and all the market monetarists want money printing and Ben freely admits it. I am no fan of Ted Cruz, but could he be latching on to some valid arguments?
Mises.org (Austrians), and their buddies like Peter Schiff, want money tightening in place of printing.
What I think is that the Fed tightens when it should loosen and loosens when it should tighten. What works one time does not necessarily work another time. But that is a layman’s opinion. I just think there is not enough flexibility in the system to do what needs to be done,when it needs to be done.
Now, I believe that Keynesians like Roger Farmer and non Keynesian Mish would say the tightening by the Fed was a result of the credit crisis, and that the credit crisis, not tight money, was the cause of massive layoffs. That isn’t so far different than the Austrians.
