I have spent the last couple of days in the US – in New York and in Boston. Even though I have been working I have also had time to meet up with friends.
Today in Boston Scott Sumner was my host. It was actually the first time Scott and I met – two left-handed monetary geeks. I am not sure we realized what was happening around us as we spent all afternoon talking about economics, politics, American versus European culture and a shared disillusion with monetary policy makers (in a disillusion with all policy makers).
We covered a lot of stuff in a few hours this afternoon, but a key take away is our common concern about the supply side impact of this crisis. Both Scott and I fear that five years into this crisis the lack of an appropriate monetary policy response have led to very unfortunate policy decisions in other areas.
Hence, both Scott and I agree that moral hazard problems in global financial system have become a lot worse during this crisis than before. I think that both Scott and I will blog a lot more about that in the future. In that sense I think it is save to conclude that as particularly the US economy is moving back to some “normality” and quasi-nominal stability our focus will increasingly be on supply issues. That is not to say that we will stop talking about monetary policy. Both of us have been obsessed with monetary policy issues for decades so we will certainly not stop talking about it.
Furthermore, as the particularly the US is gradually (and too slowly) exiting the crisis it will become important to win the intellectual fight over the history of the Great Recession.
The Great Recession was not caused by market failure. The Great Recession was a result massive monetary policy. The Sumnerian-Hetzelian analysis is correct. Monetary policy became insanely tight in 2008 both in the US and Europe. There was a lot of other things went wrong in the lead up to the crisis – for example the expansion of the global financial safety net which massively increase the fragility of the global financial system prior to the crisis, but it was the monetary contraction in 2008 which was the main cause of the crisis.
If we fail to get that message across then policy makers are doomed to repeat the failures of 2008.
I shouldn’t really share the picture below, but this probably is a pretty good illustration of how two monetary policy nerds look like. Here Scott and I are on the road on the way to Scott’s home.
Thanks for a great day Scott!
PS I am toying with an idea that I want to write two blog posts about the medium-term outlook for the US economy. One positive and one negative. during the last couple of days I mostly got material for the optimistic post. The US is still a great nation and I am always happy to visit and I look forward to be back soon.