Demanding answers March 15, 2012 at 7:07 am
In late 2008 the markets were telling us that the Fed was making a tragic mistake by allowing NGDP expectations to plunge. But the economics profession didn’t listen, as they view stock investors as being irrational. Economists were obsessed with the notion that the real problem was banking distress, and that fixing banking would fix the problem. No, the real problem wasn’t banking, the real problem was nominal.
That goes a little far for me – it’s pretty hard to have rising aggregate demand if the credit supply is falling due to a broken banking system (and in particular a broken transmission mechanism) – but there is more than a grain of truth to this.