We’ve all seen movies or other forms of drama where the hero comes to a belief or knowledge of some huge threat and then tries to warn the world at large. His or her passionate warnings however fall on indifferent or hostile ears. Think of Chief Brody in Jaws tell the mayor of deadly shark attacks to come. These things always focus on physical science, never economics.
Yet it can happen in economics as well. Or at least there is a similar story about the “Great recession”.
The conventional wisdom as the economy unwound in late 2008 was that the real economy was spiriling down and the Fed was out of bullets as interest rates were rock bottom low. This story seemed to jive with a text book macroeconomics where interest rates can reach a lower bound and monetary policy become toothless.
Yet in the analysis there has been an opponent to this. See this.
This is the story basically:
In case the WSJ piece falls behind a paywall, here’s the money graf:
Then, in summer 2008, the Fed committed what Mr. Mundell calls one of the worst mistakes in its history: In the middle of the subprime crunch—exacerbated by mark-to-market accounting rules that forced financial companies to cover short-term losses—the central bank paused in lowering the federal funds rate. In response, the dollar soared 30% against the euro in a matter of weeks. Dollar scarcity broke the economy’s back, causing a serious economic contraction and crippling financial crisis.
Scott Summers waged a somewhat lonely struggle to promote this alternative point of view. He seems to have made a major impact and has convinced other major economists, including Noble prize winner Robert Mundell who now tells the story above.
He paid a personal price for his efforts as he explained in the post about two months ago after tireless blogging to promote the idea of monetary policy’s role in the 2007-2009 recession.
I am complete burned out, and have been for months. I’ve blogged an average of eight hours a day, seven days a week, for over two years. I’ve only kept going in recent months out of a sense of obligation to keep pushing these issues. But now that lots of other people are saying the exact same thing, it’s time for me to take a break. So I’ll stop blogging for a few months, unless there is some huge news story like QE3, in which case I’ll add a couple posts. Or if someone does a hit job on my marshmallow post, I may need to briefly respond. Otherwise I’m done for now, and will return sometime this summer.
I find the whole thing fascinating that an economist could be the protagonist in the story of pushing an unpopular truth but like a movie hero finally triumph.
I plan to return to blogging after July 4th, although with even Nobel Laureates now acknowledging that a tight Fed monetary policy in late 2008 caused the severe slump, I don’t see any pressing need to return.
I do continue to follow the news and make notes, so I promise a very active July of blogging.