Paul Krugman has a post up highlighting some of the lessons we've learned since 2008. He's using a Liquidity Trap model, which, regular readers know I've been very critical of (see here and here for some exciting reading on this).* But I wanted to highlight a different point - what have we NOT learned since 2008 that is still holding us back:
- The money multiplier myth is still rampant. Unfortunately, Paul Krugman's Liquidity Trap model perpetuates this myth. This results in the view that banks are choosing to hold onto reserves rather than lend them out. Of course, this is completely wrong, as I've highlighted time and time again. Banks do not lend reserves to the non-bank public. The money multiplier is a total myth. And despite the fact that some rather prominent economists and institutions have admitted as much, we still see this myth in the mainstream econ work on almost a daily basis. In addition to this list of prominent economists who believe this myth, here's Nobel Laureate Joseph Stiglitz just a few days ago saying the same basic thing... Why do mainstream economists downplay the importance of banking and the operational realities that influence the way it impacts the real economy?
- Monetary Policy just isn't as powerful as some economists think. In the last seven years, we've seen unprecedented levels of monetary policy expansion. And what have we got to show for it? A stagnant global economy, and one of the worst recoveries in modern history. All the while, we've seen endless predictions about how all of this would cause government insolvency or hyperinflation. These predictions all turned out to be wrong, just like I said they would. Despite this, we continue to see this experiment play out in the form of new forms of monetary policy, such as negative interest rates. What does it take to convince policymakers that the Central Banks of the world just aren't as powerful as some people lead us to believe?
* - The word "exciting" is used as a synonym for mind-blowingly boring.