Lessons of 2008
I have a new piece in the Cato Journal, discussing the lessons of 2008. Here is a summary:
[T]here are 10 key lessons to be learned from the
events of 2008:
1. Unstable NGDP represents a failure of monetary policy.
2. Never reason from a price change; focus on NGDP growth, not
inflation and interest rates.
3. Don’t confuse the symptoms of falling NGDP (falling asset
prices and banking distress) with the cause of falling NGDP
(overly tight money).
4. Don’t try to predict asset price bubbles; markets are smarter
5. Demand-side fiscal stimulus is relatively ineffective; any tax
cuts should focus on supply-side effects.
6. The federal government needs to reduce moral hazard in the
financial system by scaling back taxpayer protections on risky
7. Set a target path for the level of NGDP, perhaps growing at
4 percent per year.
8. Do whatever it takes to equate the forecast of NGDP growth
with the policy target.
9. Rely on market forecasts of nominal variables such as inflation
and NGDP, not internal Fed forecasts.
10. Do not pay interest on bank reserves during an economic