I've been reading through Anna Schwartz's papers on monetary economics and I think they're the real story on what economists still don't get about the 2008 crisis.
If you read through the old monetarist research, you see that change in money supply has a better correlation with recession than basically anything else. This holds true even when you control for the possibility of reverse causation, when you make sure that you're actually dealing with a leading indicator of this cycle rather than a lagging indicator of the next cycle, etc, etc.
Keynesians think that the only measure of how tight or loose monetary policy is comes from interest rates, so they can't wrap their heads around how 1% interest rates can still be tight money. The real story of the economics crisis is that the banking crisis deposit:reserve ratio through the floor. This means that a bunch of money disappeared as banks preferred liquidity. The central bank didn't do enough to replace this money, so people couldn't hold the money balances they wanted and stopped spending. The Fed said they were doing all they could to spur inflation, but that's obviously false. The central bank can always inflate the currency and the fact that they weren't hitting their inflation targets shows that they had tight money.
Keynesians ultimately don't think money is important enough to model and until they change that, they're going to be confused.
If you read through the old monetarist research, you see that change in money supply has a better correlation with recession than basically anything else. This holds true even when you control for the possibility of reverse causation, when you make sure that you're actually dealing with a leading indicator of this cycle rather than a lagging indicator of the next cycle, etc, etc.
Keynesians think that the only measure of how tight or loose monetary policy is comes from interest rates, so they can't wrap their heads around how 1% interest rates can still be tight money. The real story of the economics crisis is that the banking crisis deposit:reserve ratio through the floor. This means that a bunch of money disappeared as banks preferred liquidity. The central bank didn't do enough to replace this money, so people couldn't hold the money balances they wanted and stopped spending. The Fed said they were doing all they could to spur inflation, but that's obviously false. The central bank can always inflate the currency and the fact that they weren't hitting their inflation targets shows that they had tight money.
Keynesians ultimately don't think money is important enough to model and until they change that, they're going to be confused.