It official! Bob Hetzel’s book “The Great Recession: Market Failure or Policy Failure” is finally out. Buy it! Needless to say I ordered it long ago.
We all know it – Bob Hetzel has a Market Monetarist explanation for the Great Recession. It was caused by overly tight monetary policy – what Bob calls the Monetary Disorder view of the Great Recession.
John Taylor has a favourable review of the book here.
David Beckworth comments on Taylor here.
Scott Sumner comments on Hetzel, Taylor and Beckworth.
And finally Bill Woolsey also has a wrap-up on Hetzel, Taylor, Beckworth and Sumner (and Marcus Nunes for that matter).
Do I need to add anything? Well no, other than just buy that book NOW!!
Here is that official book description:
“Since publication of Robert L. Hetzel’s The Monetary Policy of the Federal Reserve (Cambridge University Press, 2008), the intellectual consensus that had characterized macroeconomics has disappeared. That consensus emphasized efficient markets, rational expectations, and the efficacy of the price system in assuring macroeconomic stability. The 2008-2009 recession not only destroyed the professional consensus about the kinds of models required to understand cyclical fluctuations but also revived the credit-cycle or asset-bubble explanations of recession that dominated thinking in the 19th and first half of the 20th century. These “market-disorder” views emphasize excessive risk taking in financial markets and the need for government regulation. The present book argues for the alternative “monetary-disorder” view of recessions. A review of cyclical instability over the last two centuries places the 2008-2009 recession in the monetary-disorder tradition, which focuses on the monetary instability created by central banks rather than on a boom-bust cycle in financial markets.”
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UPDATE: David Glasner also has a comment related to Taylor-Hetzel.
The Market Monetarist 
Darko Oračić
/ April 4, 2012Hetzel argues that monetary policy in 2008 was not expansionary enough to prevent the Great Recession. In contrast, Taylor claims that “the Fed overshot and took the funds rate to 5-1/4 percent and held it there…” and that the overshot “worsened the bust” . As the funds rate reached 5.25 percent already in mid-2006, I think that the overshot actually caused the bust. Two years ago, I asked John C. Williams for his estimate of the natural interest rate in 2006 and he said that the funds rate was “about 1-1/4 percentage point above the current smoothed estimate of the natural rate”. So the Fed not only failed to prevent the recession, it caused the recession.
flow5
/ April 9, 2012POSTED on: Dec 13 2007 06:55 PM |
BERNANKE SHOULD HAVE SEEN THIS COMING. IN DEC. 2007 I DID:
Contrary to economic theory, & Nobel laureate Dr. Milton Friedman, monetary lags are not “long & variable”. The lags for monetary flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation indices, are historically, always, fixed in length
10/1/2007 -0.47 -0.22 * temporary bottom
11/1/2007 0.14 -0.18
12/1/2007 0.44 -0.23
1/1/2008 0.59 0.06
2/1/2008 0.45 0.10
3/1/2008 0.06 0.04
4/1/2008 0.04 0.02
5/1/2008 0.09 0.04
6/1/2008 0.20 0.05
7/1/2008 0.32 0.10
8/1/2008 0.15 0.05
9/1/2008 0.00 0.13
10/1/2008 -0.20 0.10 * possible recession
11/1/2008 -0.10 0.00 * possible recession
12/1/2008 0.10 -0.06 * possible recession
Exactly as predicted:
flow5
/ April 9, 2012As soon as Bernanke was appointed to the Chairman of the Federal Reserve, he initiated a “tight” money policy (ending the housing bubble in Feb 2006), for 29 consecutive months, or at first, sufficient to wring inflation out of the economy, but persisting until the economy plunged into a depression).
The FOMC continued to drain liquidity despite its 7 reductions in the FFR (which began on 9/18/07). I.e., despite Bear Sterns two hedge funds that collapsed on July 16, 2007, & immediately thereafter filed for bankruptcy protection on July 31, 2007, the FED maintained its “tight” money policy (i.e., credit easing, not quantitative easing).
An asside note: Nominal gDp’s 2 year rate-of-change (which equals what the FED can control — i.e., MVt), peaked in the 2nd qtr of 2006 @ 12%. Bernanke let it fall to 8% by the 4th qtr of 2007 (or by 33%). It fell to 6% in the 3rd qtr of 2008 (another 25%). It then plummeted to a -2% in the 2nd qtr of 2009 (another [gasp] – 133%).
I.e., Bernanke didn’t initiate an “easy” money policy until Lehman Brothers later filed for bankruptcy protection (& it was one the Federal Reserve Bank of New York’s primary dealers in the Treasury Market), on September 15, 2008. The next day AIG’s stock dropped 60%.
By waiting to inject liquidity, risk aversion was amplified, haircuts were increased, additional and/or a higher quality of collateral was required, liquidity mismatches grew, funding sources dried up, long-term illiquid assets went on fire-sale, a counterparties’ creditworthiness was examined more carefully — all of which lead to runs on financial companies.
flow5
/ April 9, 2012To counter what Greenspan described as “irrational exuberance (at the height of the Doc.com stock market bubble), Greenspan initiated a “tight” monetary policy (for 31 out of 34 months). A “tight” money policy is defined as one where the rate-of-change in monetary flows (our means-of-payment money times its transactions rate of turnover) is no greater than 2-3% above the rate-of-change in the real output of goods & services.
Greenspan then wildly reversed his “tight” money policy (at that point Greenspan was well behind the employment curve), and reverted to a very “easy” monetary policy — for 41 consecutive months (i.e., despite 17 raises in the FFR, -every single rate increase was “behind the curve”). I.e., Greenspan NEVER tightened monetary policy.
I.e., Greenspan didn’t start “easing” on January 3, 2000, when the FFR was first lowered by 1/2, to 6%. Greenspan didn’t change from a “tight” monetary policy, to an “easier” monetary policy, until after 11 reductions in the FFR, ending just before the reduction on November 6, 2002 @ 1 & 1/4% (approximately coinciding with the bottom in equity prices).
I.e., Greenspan was responsible for both high employment (June 2003, @ 6.3%), & high inflation (rampant real-estate speculation, followed by widespread commodity speculation – peaking in July 2008 – Greenspan’s inflection point).