Scott Sumner  

What does Ted Cruz know that most Ivy League economists don't know?

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A commenter named Cameron sent me this interesting exchange from the recent GOP debate:

CRUZ

"Yes. Now, let's be clear, there is a role for the Federal Reserve -- what the Fed is doing now is it is a series of philosopher-kings trying to guess what's happening with the economy. You look at the Fed, one of the reasons we had the financial crash is throughout the 2000s, we had loose money, we had an asset bubble, it drove up the price of real estate, drove up the price of commodities, and then in the third quarter of 2008, the Fed tightened the money and crashed those asset prices, which caused a cascading collapse. That's why I am supporting getting back to rules-based monetary system not with a bunch of philosopher-kings deciding, but tied..."

MODERATOR:

"Sir, I understand that. I just want to be clear, if you don't mind, that millions of depositors would be on the line with that decision. And I just want to be clear. If it were to happen again, for whatever the reason, you would let it go, you would let a Bank of America go?"

CRUZ:

"So let me be clear. I would not bail them out, but instead of adjusting monetary policy according to whims and getting it wrong over and over again and causing booms and busts, what the Fed should be doing is, number one, keeping our money tied to a stable level of gold, and, number two, serving as a lender of last resort."


I don't agree with Cruz on gold, but do agree that the tight money policy of late 2008 made the banking crisis worse. (And I also agree with him on the need to replace philosopher kings with strict policy rules.) When I began making this claim in late 2008 most people gave me a funny look, as policy was widely seen as being highly expansionary. More recently Vasco Curdia showed that money got much tighter in 2008, and in his recent memoir Ben Bernanke admitted the Fed erred in not cutting rates in September 2008. And now this view shows up in the presidential campaign debate. I can't prove the implied claim in the post title, but that's my perception. Most economists I meet still think Fed policy has been expansionary since 2008. Good for Cruz, now if we could only sell him on NGDPLT.

(And no, I am not endorsing him, and will not endorse any candidate in 2016.)


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CATEGORIES: Monetary Policy




COMMENTS (8 to date)
Garrett M writes:

Why won't you endorse a candidate? I recall your endorsing Gary Johnson in 2012.

A writes:

I don't know... Cruz's appeal to gold implies that he thinks of policy stance in terms of uncontextualized Fed behavior. If he is looking at discrete actions to determine policy, then how does he identify tightening in 2008?

Levi writes:

"And I also agree with him on the need to replace philosopher kings with strict policy rules."

Never going to happen. Too much money in it for the "philosopher kings."

ThomasH writes:

Maybe we need philosopher kings that will follow the rules they set. I think inflation targeting is worth a try. And it the won't follow an inflation target when inflation hawks spook them, how sure could we be they would they follow any other rule such as NGDP targeting?

And do you agree with Cruz that money was "loose" until Q3 2008. (And he did not say that he agreed with you that it remained "tight" after Q3 2008.)

I do not think talking about "tight" and "loose" is too helpful. I think it's better to talk about what instruments the Fed was or was not using and when.

Mr. Econotarian writes:

The price of gold was $700/oz in early 2007, then went up to over $900/oz in the first six months of 2008. That would have been pretty tight!

(Gold was under $400/oz until about 2004, so that would have been relatively "loose" during the bubble anyway)

Curt Doolitlte writes:

[Comment removed. Please consult our comment policies and check your email for explanation.--Econlib Ed.]

Scott Sumner writes:

Garrett, I suppose I meant I won't endorse one of the two major parties, as I am fed up with both of them. In any case, I assume Hillary will win, the "race" bores me.

But yes, I did like Johnson, is he running again?

A, I don't expect politicians to have a sophisticated understanding of monetary policy, which is why the 2008 Q3 comment surprised me.

Thomas, No, I think money was loose in 2006, but by early 2008 it was getting tight.

Econotarian, Just to be clear, do you mean "that would have been tight" if the dollar had been pegged to gold at that time?

Jose Romeu Robazzi writes:

@Thomas H
The idea of having "enlightened" philosopher kings is not to follow rules, because the hypothesis is that reality is too complicated and we need people who can "perceive" what is going on and decide accordingly. The point is that we have seen two things: 1. Even the smartest people at the Fed will make mistakes from time to time (and will affect billions of people by doing that), and 2. Inflation Targeting is not that straightforward, it demands that people have a macro model that always works, working with conceptually nice but difficult to estimate macro aggregates such as "money supply", "output gap", "inflation", "NAIRU", etc (yes, inflation is a difficult there is GDP deflator, CPI, CPI-core, PCE-Core, PPI, etc, etc, which one should be used?). Rules based, NGDP Futures based rule is simple and straightforward, and should be given a shot now, after other approaches showed what they can deliver (not much, in my view)...

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