In the 1930s everyone seemed to think Fed policy was expansionary. They cut rates close to zero, they dramatically increased the monetary base, they encouraged banks to hold on to more reserves. Hoover set up a fund to help the banking system. I’m not disputing that the Fed has done more this time. But Bernanke himself admitted that we now know Fed policy was actually contractionary during the 1930s. By what benchmark can the economics profession say it was contractionary then, but is highly expansionary now? I’ve asked the question 100 times of my fellow economists and still haven’t received an answer.
The broader aggregates? OK, I admit they fell in the 1930s. But I thought the monetary aggregates were discredited as policy indicators in the 1980s? Now you have economists who had dismissed monetarism as a washed up doctrine suddenly clinging to the aggregates as the one piece of evidence that money was easier this time than in the 1930s. This crisis makes economists look like a bunch of atheists who suddenly accept the Lord on their deathbed. Well it’s too late for that, even M3 is falling now.
That's economist Scott Sumner on what we don't know about monetary policy, but think we do.
As I mentioned yesterday, I was disappointed in the WSJ coverage of the news that the Fed may stop paying interest on reserves. The coverage consisted primarily of some flimsy "this will fall flat" response. Maybe the whole interest on reserves question will turn out to be a side issue in the history of this crisis, but the WSJ won't convince me of that with coverage reeking of cable TV conventional wisdom.
Go read Sumner's whole post, it is not long and non-technical. By the end you may be asking yourself whether our current monetary policy really is what you thought it was.