## Wednesday, November 4, 2009

### Re:Does macro need a paradigm shift

This is in response to Scott Sumner's post on his blog, which I recommend reading.

1.

a. First of all, I agree that we need a common, more formal definition of what it means for money to be "tight" or "loose." I think it will be impossible to define what we mean by 'tight/loose money' because of the basic differences in paradigm between the different economic views. Its not that we are all on separate pages; we are reading out of different books.

b. I disagree that your views are that far from the norm, you are fairly standard for a monetarist school economist. Its rather that the econ-blogosphere tends towards the heterodox.

2. This plot suggests that the money supply wasn't that different than normal. AMB was same as normal at the start of the recession M1 and M2 were also.

3. CPI saw a small bump, but PPI had a massive spike.

So, I guess, yes, wrt actual commodities, money was tight, but in an absolute sense, money was not tight (M2 didn't drop appreciably).
That makes me think the 'tight money' story isn't true, because 'tight money' would cause deflation not huge PPI inflation.

4. M2 grew at a much faster rate than M1 (as would be expected) and AMB grew much faster than either of those. To me this looks like a huge push to de-leverage and get out of certain types of assets and get into cash. Also this fits the story of the Fed buying up bank assets.

5. I don't buy the TIPS story, precisely because there was a global push to get out of securities and into cash to avoid bankruptcies.

6. There is no six.

7. I think the 'recalculation' story explains this recession better than a 'tight money' story. Businesses made bad bets, their income was too low for their assets and then they had to de-lever, and switch to more profitable/less expensive business plans. This also somewhat fits John Geanakoplos's theory.

8. It seems to me that the Fed's basic problem is that it is ignoring markets in an attempt to fix them. It can't properly price interest rates which results in either gluts or shortages of money/credit.

For math: Type your TeX math expression, in ....
For example \sqrt{a^2+b^2}
Looks like $$\sqrt{a^2+b^2}$$