Scott Sumner argues that a tight money policy by the Fed in 2008-09 largely caused the Great Recession

See A boringly conventional contrarian by Scott Sumner.

"In my new book entitled The Money Illusion, I argue that a tight money policy by the Fed in 2008-09 largely caused the Great Recession.  I’d guess that 99% of economists don’t agree with me on that point.  That makes me a contrarian.

But if I am a contrarian, it’s of a type that is quite common throughout history.  Consider:

1. In the 1930s and 1940s, almost all economists believed that the Great Depression was not caused by a tight money policy at the Fed.  In the 1960s, Milton Friedman and Anna Schwartz convinced many economists that an excessively tight money policy was largely to blame for the Depression. By 2002, even Fed officials like Ben Bernanke acknowledged the Fed’s guilt:

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

2.  In the 1960s and 1970s, most economists did not blame the Fed for the Great Inflation.  A few decades later, most economists thought the Fed was to blame.  (Ben Bernanke among them.)

3.  In the 2010s, most economists did not blame the Fed for the Great Recession.  Market monetarists did.

What do the first two cases have in common?  In both cases, an economist focusing on interest rates would be unlikely to blame the Fed.  Rates were very low in the 1930s, and hence money did not look tight.  Rates rose sharply in the 1970s, and hence monetary policy did not look expansionary.

So why did economists change their mind?  In both cases, NGDP signaled a problem.  NGDP fell roughly in half during the early 1930s, which sure looks like tight money.  NGDP growth averaged 11% during 1971-81, which sure looks like easy money.

This is why my contrarianism is so boringly conventional.  I’m merely trying to do for the Great Recession what other economists have already done for the Great Depression and the Great Inflation.  I’m attempting to get people to see that a “Great” economic problem, which didn’t look monetary in real time, actually was monetary.  I am trying to get people to believe that money was tight in 2008, even though it didn’t look tight.  I hope to convince people that the huge drop in NGDP growth during 2008-09 is prima facia evidence of an excessively tight monetary policy.  I am trying to get people to see the post-Lehman banking crisis as being caused by falling NGDP, just as the 1930s banking crises were caused by falling NGDP.

In fact, my contrarian take on the Great Recession is so similar to previous reappraisals of the Great Depression and the Great Inflation that I’m tempted to say that it is I that is actually the conventional economist and all those who have not come around to my view are the true contrarians.

It’s a longstanding tradition for economists to initially blame “Great” problems on non-monetary factors, and then later see them as monetary policy failures.  Why stop now? Keep the tradition alive!"