Scott Sumner on Monetary Policy

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🗓️ 9 November 2009

⏱️ 69 minutes

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Summary

Scott Sumner of Bentley University and the blog The Money Illusion talks with host Russ Roberts about monetary policy and the state of the economy. Sumner argues that tight money in late 2008 precipitated the recession. He argues that the standard measures of monetary policy--growth in reserves or the Federal Funds rate--are misleading. Sumner suggests focusing instead on nominal GDP. He argues that the failure of the Fed to counter the drop in nominal GDP in late 2008 intensified the recession and points to the growth in unemployment. Along the way he discusses the Taylor Rule and other monetary prescriptions.

Transcript

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0:00.0	Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts
0:13.9	of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org
0:21.2	where you can subscribe, find other episodes, comment on this podcast, and find links to
0:26.5	another information related to today's conversation. Our email address is mailadicontalk.org. We'd
0:33.6	love to hear from you. Today is October 30th, 2009, and my guest is Scott Sumner of Bentley
0:43.5	University who writes the blog, The Money Illusion. Scott, welcome to Econ Talk.
0:47.7	Thank you, Russ. Thanks for inviting me. Now, you are very critical of monetary policy for the
0:54.8	mess we're in as our others, but your perspective on it is a little bit different. Tell us what you
1:00.6	think went wrong and when it went wrong. Okay. First of all, what I usually do is divide up the crisis
1:06.8	into two parts. The initial crisis when the subprime mortgages became a big issue in late 2007. I think
1:14.3	played out pretty much like most people, most other people think. And the economy slowed down a
1:20.0	little bit for a year up until about August 2008. Unemployment rose a little bit, but there was no
1:26.3	damage to the broader economy outside of housing and banking. And then I think where people went
1:32.3	wrong is that they underestimated how much of an error monetary policy made after about August
1:37.5	2008. In my view, it became unintentionally highly contractionary in the only sort of definition
1:46.6	of the stance of monetary policy that makes any sense. So let me just talk about a couple other ways of
1:53.6	looking at monetary policy that most other people use. A lot of people are surprised when I say
1:58.8	policy was contractionary because they think, well, wait, didn't the Fed cut interest rates to low
2:02.8	levels. But that's actually a very misleading indicator of monetary policy. I mean, in the early
2:09.6	1930s, the Fed also cut interest rates to low levels. But today, most economists think monetary
2:15.4	policy was actually highly contractionary in the Great Depression. Some people point to real
2:22.4	interest rates, but those actually rose sharply in the last half of 2008. Other people point to
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