Myths We Teach Our Children

11.  We teach our students that the Fed did everything it could to prevent the Great Recession, but it was out of ammunition due to the zero bound problem, even though interest rates were not cut to 0.25% until mid-December 2008, a year into the recession and a time when output was already nearing the recession lows.  And even though the Fed enacted interest on reserves in October 2008, a contractionary policy.  And the Fed refused to cut interest rates after Lehman failed in September 2008.  Excuses made for the ECB are even more absurd, as they didn’t hit the zero bound until 2013.

12.  We teach our students that a foolish policy of “fiscal austerity” slowed the recovery from the Great Recession, even though the recovery sped up after fiscal austerity was enacted in January 2013 (due to easier money).

13.  Our explanation of the 2008 banking crisis focuses on big banks and subprime mortgages, whereas the biggest problem was small and mid-sized banks with bad commercial loans.

14.  We are told that in late 2007 and early 2008 we slid into recession because velocity slowed down—the Fed was printing money.  Actually, the Fed stopped increasing the monetary base in late 2007 and early 2008, and we went into recession despite velocity increasing.

I see some common themes in these myths:

1.  We want our students to believe that fiscal policy is powerful and monetary policy is weak.

2. We want our students to believe that monetary policy is about interest rates.

3.  We want our students to believe that market economies are unstable, in need of regulation.  We want them to believe that asset price bubbles are real, and can cause problems.

4.  We want them to believe that big business is the villain and the government is the hero.

To summarize, we don’t teach true facts, we teach facts that we’d like to believe are true.

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