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
than policymakers.
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
loans.
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
slump.
READER COMMENTS
Mark Bahner
Jun 2 2019 at 10:24pm
Hi Scott,
“60 Minutes” had an interview of Jerome Powell tonight. I guess it’s a re-run…though I don’t remember seeing it. Anyway, you might find it interesting.
He promised that taxpayers won’t be on the hook in the future for bank failures. (That’s my recollection, which may be off.)
Mark
Scott Sumner
Jun 2 2019 at 11:26pm
Thanks Mark. Unfortunately, they will still be on the hook. He’s wrong.
Thaomas
Jun 3 2019 at 5:34pm
You are probably right, but not necessarily if bailed-out institutions have their exiting shareholders zeroed out and are sold off when the recovery is underway, which won’t be long if the Fed is targeting an NGDP level trend or full employment and a price level trend.
Scott Sumner
Jun 3 2019 at 11:19pm
I’m not so much worried about stockholders being bailed out as I am about depositors being bailed out (a much bigger risk).
Thaomas
Jun 3 2019 at 7:39am
All these are pretty good. None address the issue of why the Fed should target NGDP growth — one very specific, although very reasonable — interpretation of its dual mandate — instead of full employment and price level growth. If we want a more market determined policy the Fed could separately intervene in both a PL futures market and a real GDP futures market.
While fiscal policy should not try to substitute for monetary policy in a recession, consistent application of an NPV rule for expenditures would result in what would look to hostile observers like “fiscal stimulus,” especially if monetary policy has the effect of reducing long term borrowing rates at which benefits of public sector projects are discounted.
Although it is implicit in the list, it might be worth adding an “anti-austerity” point about not trying to reduce budget deficits during recessions. An NPV spending rule of course implies that deficits or debt are never arguments in an investment decision function.
I’d like to see the reasoning behind the implicit 2% PL target + 2% real GDP target. Given the possibility of the Fed failing to “do what it takes” to prevent the Price Level or real GDP from drifting below the targets implicit in an NGDP rule — possibly because of a reluctance to push the interest rate instrument into negative territory, to purchase sufficient quantities of other assets, or felt constraints on whatever instruments they use — wouldn’t a higher NGDP target be wiser?
Not to belittle prudential regulation, but moral hazard can also be dealt with by a policy of zeroing out the equity of the owners of institutions that need to be intervened in a recession. The behavior of financial institution post-crisis gives me the impression (I may be wrong) that their stockholders still do not fear total loss enough.
Scott Sumner
Jun 3 2019 at 11:21pm
I’m not all that worried about the zero bound with a 4% NGDPLT target. I think it’s high enough to keep interest rates above zero.
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