Okay, so the title is a poor play on words (see below). Moving on.

Daniel Kuehn comments on Greg Mankiw’s recent blog post, “The Liquidity Trap May Soon Be Over.” I do not have much to say on Mankiw or liquidity traps, but Daniel brings up two interesting — tangential — points that I would like to comment on.

Interest rates and monetary policy: Daniel asks us who in their right mind could accuse monetary policy of being “too loose” between 2000–07 and at the same time call monetary policy between 2007–present “too tight.” He, of course, takes as his starting point that in both eras we see “low interest rates.” I think he is right, but I do not think he would agree with what I would conclude: monetary policy during this recession has been too loose. I wonder, though, who he has in mind when he poses his inquiry, because I think that the ideas of “loose money” and “tight money” differ from theorist to theorist.

To Austrians, loose monetary policy leads to malinvestment. Austrians, however, are not the only economists to consider monetary policy between 2003–07 “loose.” Indeed, while I cannot cite the exact page from Stiglitz’ The Stiglitz Report (I am in Los Angeles for the week), I know that Stiglitz also refers to “easy credit” policies as causes of the recession. However, rather than a theory of discoordination, I think Stiglitz sees only the fact that credit was distributed too easily to people who probably should have never received it. Anyways, I am not privvy to any sophisticated theories — other than the Austrian one — that link interest rates, monetary policy, and economic discoordination.

The only economists I can think of who fit Daniel’s description are Austrians who also agree with monetary disequilibrium theory. I think, though, that even Austrians of this type have become disillusioned with the notion of insufficient money — it has been over three years, and prices have still not adjusted. I think more and more of these economists are looking elsewhere for explanations (regime uncertainty, mostly). Also, I firmly believe that if conditions were different, we would see sufficient evidence to prove that monetary policy has been “too loose” and that the only reason we have not seen the more adverse effects of such a policy (widespread malinvestment) is because of the continued depression in investment. Again, I am not sure Daniel would agree with me on this, but this is my take on this matter.

Milton Friedman said that looking at interest rates was a poor method of judging monetary policy. While I cannot be sure, I think that the implications of this escaped even Friedman. There are factors beyond monetary policy at play, and these factors have handicapped the ability to stimulate production (whether you believe this stimulation to be positive production or malinvestment) through monetary injections.

Austrians and NGDP Targeting: Daniel writes that he is surprised to see that many Austrians, since late 2011, have become more open to NGDP targeting. I think that if you look at the free banking literature, this is what these Austrians have been arguing in favor of for a very long time — NGDP targeting is a “second best” alternative to what would happen in a free banking industry. I think they are mistaken, but this is a belief they have had for a very long time. The crisis, though, may have turned attention to the Austrian theory of free banking, converting fellow Austrians who had formerly belonged to the “full reserve” camp and, in turn, pushing them to support these types of “second best” measures.

I am a little offended though. Daniel writes “every Austrian in the blogosphere” when he makes his point; I think I have been clear in my criticism of any fiduciary expansion (despite being a free banker) and I am an Austrian on the blogosphere. I guess that is what I get for going offline for almost a year.