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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