Photo by Ryan Mercier on Unsplash

In my book entitled The Money Illusion, I argued that the housing bubble of 2003-06 was not the cause of the Great Recession, partly because there was no housing bubble. Instead, the real problem was nominal—a tight money policy drove NGDP growth from 5% to negative 3%.

In a recent podcast with Pradumnya Prasad, Tyler suggests (around the 55 minute mark) that he’s changed his mind on the events leading up to the Great Recession, and no longer believes there was a nationwide housing bubble.

Tyler instead points to problems in the shadow banking system, which in my view were mostly (not entirely) a symptom of the recession, not a cause. Prasad then discusses the view that Fed policy caused the Great Recession (a view held only by me and a tiny number of other market monetarists.) If one insists on talking about interest rates, then one might say that the Fed held rates above equilibrium during 2008, as the housing slump sharply reduced the equilibrium interest rate. Banking problems post-Lehman were mostly an effect of that tight money policy, which sharply reduce asset values.

Tyler suggests that he supports NGDP targeting, but doesn’t think it fits all situations. I don’t find his reasoning to be persuasive, but of course it’s hard to make subtle points in an interview format. If I had to defend his general view, I’d make the following sort of argument:

It’s useful to differentiate between a NGDP targeting regime, and NGDP as a short-term guidepost when the central bank is trying to achieve some other objective. Thus while a regime of 4% NGDP growth may be optimal, if the previous year has seen 0% or 8% NGDP growth, and the central bank doesn’t have a 4% NGDP target, then it may or may not not be optimal to suddenly shift to 4% NGDP growth.

Overall, I was pleased to see Prasad mention the hypothesis that the Fed caused the 2008-09 recession. It makes me feel that we might be making a bit of headway in getting our ideas out into the broader community.

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