Mundell as Sumnerian?
By Arnold Kling
Part Two of Mundell’s analysis is the most intriguing and least understood aspect. He argues that, as the real-estate bubble burst, large quantities of fresh liquidity were demanded by the public and banks. In summer 2007, the world’s central banks supplied it and no liquidity crunch developed. But by summer 2008, spooked by rising inflation, the U.S. Federal Reserve failed to provide adequate cash, leading to dollar scarcity. Four key symptoms of tight money appeared within months: the dollar rose 30 percent against the euro; gold fell 30 percent; oil fell 80 percent; and the inflation rate dropped from 5.5 percent to negative levels. As a result, Mundell believes, Lehman Brothers collapsed, the stock market went into free fall, and a near-panic ensued. This phase was entirely preventable and constitutes one of the worst mistakes in Fed history, Mundell says. The crisis eased in early 2009, as the Fed upped the money supply, but the damage was done.
This refers to Nobel Laureate Robert Mundell. Back when I was in grad school, Mundell was treated by the MIT faculty as: (a) a mythic figure in open-economy macroeconomics; (b) someone to whom Rudi Dornbusch owed a huge intellectual debt; and (c) someone whose elevator no longer went to the top floor.
Anyway, he seems to espouse a view that tight money caused the severe financial and economic downturn, which puts his elevator on the same floor as that of Scott Sumner.