Scott Sumner: belief

Transcript context

…Way back when, I recall Brad DeLong saying something like the following, and here I’m paraphrasing: “Well, stabilizing the growth path of nominal GDP, that could be a good thing. What it really means is that we ought to bail out General Motors, because that will make it easier to stabilize nominal GDP without having too high a rate of price inflation.” Do you agree or disagree? Yes, I disagree with that and pretty much with all similar statements. I would even go further: I don’t even think bailing out the financial system was the essential problem we faced in 2008. I believe the financial crisis was mostly a symptom of rapidly falling nominal GDP expectations. In other words, if you stabilize the path of nominal GDP, that takes care of most of the other structural problems in the economy. At that point, you have individual companies failing here or there, individual banks that perhaps were poorly managed. We had Silicon Valley Bank fail recently during an otherwise healthy period in the economy. Those things happen. I don’t think those sectoral shocks are crucial in driving the business cycle. As long as the monetary policy keeps the total path of spending along a stable growth path, we can let other policymakers address those issues. Congress can decide if they want to bail out General Motors, for instance. Can’t credit markets break down on their own? Say, today, a large private equity firm turned out to be more leveraged than it seems at the moment, and they became insolvent, and that would be a macroeconomic crisis. I certainly would agree it would be a good idea to stabilize the expected growth path of nominal GDP, but is any kind of credit market intervention needed? Again, Congress is not going to do it well. We know that. What should monetary policy do?…

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