The other night, RealClearPolitics hosted a dinner with Tim Congdon, the author of Money in a Free Society. Congdon is a British disciple of Milton Friedman. Scott Sumner knows who he is, but not vice-versa.
Unlike Sumner, Congdon uses a measure of the money supply as an indicator of the stance of monetary policy. Congdon favors a broad measure, M3 in the case of the United States. Actually, to Congdon's dismay, the U.S. stopped publishing official measures of M3 in 2006. However, he thinks that unofficial measures show the excess of money growth leading up to the financial crisis and a steep decline since.
Congdon is dismayed by the politics in the U.S. concerning macroeconomic policy. What I think he is finding is that the people who are most concerned with unemployment happen to be the ones who believe that we are in a liquidity trap, and therefore that monetary policy is ineffective. Congdon thinks the liquidity trap is nonsense, which of course I agree with. Meanwhile, the people who think that monetary policy is effective are the ones who are filled with fear of inflation. Congdon sees no signs of inflation, and I agree with him on that, also. In my view (and I imagine his, although he did not state it), the inflation threat is longer term and comes from the huge debt load. So Congdon's only allies here would be Scott Sumner and the "market monetarists," but when I asked Congdon about market monetarism and about Sumner, he did not know what I was talking about.
I did not blog about Congdon's book when I received a review copy. It deals primarily with the controversies about monetarism and Keynesianism in the 1970s and 1980s. As he pointed out at dinner, it appeared as of 1990 that Friedman had won and that Keynesianism was dormant. Then, in 2008, a Keynesian volcano erupted (Congdon's metaphor), and in Congdon's view the monetarists lapsed into right-wing nuttery, obsessing over inflation. Hence, the need for his book.
Most of the other attendees at dinner were well-known journalists (I sat between Robert Samuelson and Richard Miniter.) They were not inclined, and perhaps not equipped, to discuss the issues in his book, so we ended up talking more about the European debt crisis or other matters further afield. As the dinner participants introduced themselves, I was struck by how many of the journalists were no longer with the publications with which their names are associated in my mind. More had moved down the circulation ladder than up.
On the European debt crisis, Congdon's concern is that on a mark-to-market basis, most European banks are insolvent, due to their large holdings of sovereign debt, which for a number of countries is now trading at a discount reflecting the market's fear of default. He thinks that the banks should be bailed out with long-term loans (presumably from European taxpayers). He expects the banks to be bailed out in some way, because the alternative is a total financial collapse and something like a Great Depression in Europe.
Somehow, the governments and the banking sector remind me of two drunks leaning on one another, trying to make it home. Have a nice day.