Ep. 204 Scott Sumner Argues the Bernanke Fed Was Too Tight
Scott Sumner is a monetary economist with the Mercatus Center. He famously argued in late 2008 that the Fed was too tight with monetary policy, and eventually he has convinced many economists of his views. In this episode he explains why interest rates and even monetary aggregates are not good indicators of the stance of monetary policy, whereas NGDP growth is much better.
Mentioned in the Episode and Other Links of Interest:
- Scott Sumner’s Mercatus page. His blog, The Money Illusion.
- Scott argues the Fed through 2012 had been tight.
- Scott’s older book The Midas Paradox. Scott’s forthcoming book The Money Illusion. #Commissions Earned (As an Amazon Associate I earn from qualifying purchases.)
- Bob’s review of The Midas Paradox and his assessment of Market Monetarism.
- EconTalk interview with Michael Belongia (which brings up Milton Friedman’s critical comments about NGDP targeting).
- Help support the Bob Murphy Show.
The audio production for this episode was provided by Podsworth Media.
About the author, Robert
Christian and economist, Chief Economist at infineo, and Senior Fellow with the Mises Institute.
Yes!!! Someone up there is listing to my prayers.
Why would the interest rate naturally fall during a recession (00:35:00)… During a recession I would be more careful in lending, so maybe he reasons that the lendees chosen by the lendors are only the best A1 lendees, so the lendors set a low interest rate for this top of the line class of lendees?
During a recession people move from risky assets (stocks) to riskless assets (bonds). Buying bonds will make yields fall
in re: 00:35:00 maybe cause a recession is deflationary so the rates go down…
When listening, it’s important to recognize and keep in mind some of the deep muddling that causes the “real mess” Sumners mentioned:
1) Discussing whether the ‘Fed was too tight’ is like debating whether the comintern ordered the right number of chandeliers for the Soviet Union. It’s like debating whether the italian Mafia extorted the “right” amount of money from the restaurants.
Engaging in discussion which frames such a cabal as legitimate and not criminal is to participate in a major mental misdirection. Legitimizing a centrally planned money supply – a plank of Marx’s Communist Manifesto – is not a position a ‘free market person’ takes.
2) Sumner makes a correct point that the interest rate isn’t a measure of how much lending (fiat money creation) is going-on. However the way to measure money creation is to measure money creation – not Sumner constructing a function (farcical aquatic ceremony) out of NGDP and consumer price indeces. We’ve had siginificant (Austrian) inflation without corresponding rises in CPI – this indicates the new money stayed with the 0.1%.
Accepting the perversion of the definition of inflation to mean ‘consumer price increases’ is to condemn youself to sputtering nonsense. The only coherent definition of inflation is the increase in fiat money.
Accepting the muddling between CPI and inflation makes economists run around like decapitated chickens. And making careers of it. While the Federal Reserve shoves corn mash down their headless necks.
3) Sumner argues the Fed is sometimes just following reduced natural demand for loans with their interest rates. Sorry. Asymptotically approaching zero isn’t following: A sub-1% annual interest rate isn’t even in the ballpark of natural, free-market interest rates. Sumner’s justification that the ‘equilibrium interest rate’ was NEGATIVE just indicates that the ‘equilibrium interest rate’ is a farce. You don’t lend-out something valuable and pay someone to take it; It’s impossible in a market economy with real money representing real value. It’s only possible in this financial inverted clown world where the clown cartel can print ‘money’ out of nothing.
This is the confusion you get when you build a house on a fraudulent fundament – namely, the central bank and fiat-money fractional-reserve regime. Yes, “It’s a real mess,” Dr. Sumners, and untangling that gordian knot without taking out your sword and ending the source of confusion is a fool’s errand.g
I get the feeling these technicalists love losing themselves in the nitty gritty details of the technicality of it all. Maybe because it justifies their jobs. “The market will figure it out” isn’t a very good justification to draw a salary.
“I think people like the network effects of money.”
If only there was a mechanism to discover people’s preferences. I guess we’ll never know.
“1) Discussing whether the ‘Fed was too tight’ is like debating whether the comintern ordered the right number of chandeliers for the Soviet Union. It’s like debating whether the italian Mafia extorted the “right” amount of money from the restaurants.”
Or debating why some schools perform better internationally than others. Or why some legal systems are better than others. OR why some police departments are less corrupt than others. There’s a lot of statist crap in existence but incentives still exist.
“Asymptotically approaching zero isn’t following: A sub-1% annual interest rate isn’t even in the ballpark of natural, free-market interest rates.”
You seem to be contradicting yourself here. If government is terrible at managing money, then what you get is severe inefficiencies like negative natural interest rates. Scott is just pointing out they exist and the Fed does a poor job if managing that.
I don’t understand your reluctance to offer objections, you don’t have to call it a “debate” or be combative about it. You obviously have fundamental disagreements, so it is a real missed opportunity to flesh it out.