Time for a comeback to the SOMC – but it should be a monetarist SOMC and not an Austrian SOMC

I have always been a huge fan of the Shadow Open Market Committee (SOMC). However, it is having a much less prominent role in US monetary policy debate today than used to be the case in the good old days. A reason is that the SOMC played a very important role in as a counterweight to the Federal Open Market Committee when the Federal Reserve really did a bad job back in the 1970s. However, during most of the Volcker-Greenspan period the conduct of monetary policy in the US became much closer to what was being advocated by the SOMC members. That led to the SOMC to becoming less interesting as constant critique of the Federal Reserve and the SOMC star therefore faded somewhat both in the media and in academia.

However, now it should be time for a comeback for the SOMC as the performance of the Federal Reserve over the past four years would certainly not have been praised by monetarist lighthouse Karl Brunner who founded the SOMC in 1973. Unfortunately for me the SOMC has been as – if not more -disappointing as the FOMC over the past four years. Hence, most SOMC members of the past four years seem to have taken a rather Austrian and often also an overtly (partisan) politicized view of the crisis rather than a monetarist view of the crisis and it is notable that the majority of SOMC members have failed to endorse the Market Monetarist revolution – which in my view is the second monetarist counter-revolution.

The SOMC over the past four years has not been the intellectual monetarist force that it used to be in 1970s. That role instead has been played by Market Monetarist bloggers – most notably of course by Scott Sumner. However, that could change in the future. In fact why are Scott Sumner, David Beckworth or Josh Hendrickson not already members of the SOMC?

That siad in someway we are getting there. A notable exception to the present “the Fed is going to create hyper-inflation”-view on the SOMC is Peter Ireland. In my view Pete’s 2010 paper on the Great Recession is a basically Market Monetarist account of the causes of the Great Recession. In his paper Pete shows how the crisis was caused by the fed’s overly tight monetary policy. In the words of Bob Hetzel – it was monetary policy failure rather than market failure that caused the Great Recession. Unfortunately the majority of member on the SOMC don’t seem to agree with Pete on this.

Pete’s membership of the SOMC is clear positive and I am therefore also happy to recommend his latest paper – Refocusing the fed – which he presented at the latest SOMC meeting on November 20. I agree with 99.9% of what is in Pete’s paper. My only regret is that Pete does not endorse NGDP level targeting in his paper, but instead maintains the SOMC “party line” and endorses inflation targeting.

While I am critical of what have been the “majority view” on the SOMC over the past four years I remain an admirer of most of the members of the SOMC and I do think that the SOMC is a great institution and I would hope that more countries would have similar institutions, but I also hope that the SOMC in the coming years will move more in a Market Monetarist direction.

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5 Comments

  1. Alex Salter

     /  November 24, 2012

    Why are all tight-money policies labeled Austrian? Hayek favored a nominal income target, you know.

    Reply
  2. I’m kind of interested to see if there will be some sort of fusion between the Austrian crowd and the MM crowd in the coming years; as Alex mentioned, MM ideas a certainly not incompatible with many Austrian ideals (and vice versa), plus they seem to share very similar goals as far as non-monetary policy is concerned (both seem to agree on most issues related to taxation, labor law, general business regulations, etc..); Imagine how much stronger the push for NGDP targeting could be with a solid Austrian-MM coalition pushing it…

    Reply
  3. Alex and Tom,

    Alex thanks for always keeping me clear on what I write. You are of course right in saying that if we think of Austrian monetary theory as being disequilibrium theory in the sense Steve Horwitz would explain it then yes there is certainly no major difference. That then of course also answers Tom’s question.

    I believe that there is a strong similarity between the theoretical background for Market Monetarism, Horwitzian Austrianism and Selgin-White Free Banking. This not only goes for the theoretical background, but also for policy advocacy on monetary issues. We all advocate some form of nominal income/spending targeting in a world with central banks and all see at least some merits in free banking.

    So yes, I do think a “coalition” is warranted. In fact that coalition already exist and I personally is always open to including (none-Rothbardian) Austrianism and free banking thinking on my blog.

    Reply
  4. I might add that Market Monetarism is a monetary school of thought, but obviously all of the main MM bloggers can politically be considered to free market oriented, conservative or libertarian – so yes we would all tend to agree with Austrian policy views in other areas such as labour market issues or taxation.

    On none-monetary issues I don’t think that the views of the MM bloggers necessarily can be seen as the same. Even though we all tend to be libertarian/conservative I think that our views within that is rather broad within the free market camp.

    Personally I think of none-monetary issues within an old Chicago School Price Theory thinking – but that would also lead me in the direction of Public Choice theory and Virginia. And maybe Public Choice theory migh be an good inspiration for the “coalition”. After all – Public Choice theory to a large extent is the result of a fusion between Chicago and Austrianism.

    Reply
  5. Benjamin Cole

     /  November 28, 2012

    I like the idea of an SOMC, and I and also saddened by the pathetic course taken by most “monetarists” those days, in their worship of gold, their peevish fixation on inflation (however you measure it), an unhealthy obsession with price stability, and a not-so-hidden agenda that they hate the Democrats (but not big federal spending on Defense, VA and Homeland Security).

    The Austrian School has become a refuge for people who wear small mustaches and jodhpurs and have involuntary arm spasms when they hear martial music. They start with a near-religious attachment to gold, and build a “monetary policy” from that.

    Why are these gold-nut types always attracted to some sort of Teutonic rigor and resolve? How about the “Afro-Brazilian School of Monetary Policy”?

    Back to the SOMC and FOMC, I suggest that FOMC meetings be televised on CSPAN, and followed by a one-hour Q/A session, moderated by an independent sort of fellow.

    The SOMC might not be needed in that case, but rather we could have round-robins from many viewpoints.

    Reply

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