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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David Laidler: “Two Crises, Two Ideas and One Question”

The main founding fathers of monetarism to me always was Milton Friedman, Anna Schwartz, Karl Brunner, Allan Meltzer and David Laidler. The three first have all now passed away and Allan Meltzer to some extent seems to have abandoned monetarism. However, David Laidler is still going strong and maintains his monetarist views. David has just published a new and very interesting paper – “Two Crises, Two Ideas and One Question” – in which he compares the Great Depression and the Great Recession through the lens of history of economic thought.

David’s paper is interesting in a number of respects and any student of economic history and history of economic thought will find it useful to read the paper. I particularly find David’s discussion of the views of Allan Meltzer and other (former!?) monetarists interesting. David makes it clear that he think that they have given up on monetarism or as he express it in footnote 18:

“In this group, with which I would usually expect to find myself in agreement (about the Great Recession), I include, among others, Thomas Humphrey, Allan Meltzer, the late Anna Schwartz, and John Taylor, though the latter does not have quite the same track record as a monetarist as do the others.”

Said in another way David basically thinks that these economists have given up on monetarism. However, according to David monetarism is not dead as another other group of economists today continues to carry the monetarist torch – footnote 18 continues:

“Note that I self-consciously exclude such commentators as Timothy Congdon (2011), Robert Hetzel (2012) and that group of bloggers known as the “market monetarists”, which includes Lars Christensen, Scott Sumner, Nicholas Rowe …. – See Christensen (2011) for a survey of their work – from this list. These have all consistently advocated measures designed to increase money growth in recent years, and have sounded many themes similar to those explored here in theory work.”

I personally think it is a tremendous boost to the intellectual standing of Market Monetarism that no other than David Laidler in this way recognize the work of the Market Monetarists. Furthermore and again from a personal perspective when David recognizes Market Monetarist thinking in this way and further goes on to advocate monetary easing as a respond to the present crisis I must say that it confirms that we (the Market Monetarists) are right in our analysis of the crisis and helps my convince myself that I have not gone completely crazy. But read David’s paper – there is much more to it than praise of Market Monetarism.

PS This year it is exactly 30 years ago David’s book “Monetarist Perspectives” was published. I still would recommend the book to anybody interested in monetary theory. It had a profound impact on me when I first read it in the early 1990s, but I must say that when I reread it a couple of months ago I found myself in even more agreement with it than was the case 20 years ago.

Update: David Glasner also comments on Laidler’s paper.


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