I don’t think I’m adding anything original but as I understand things, George’s position rests on two claims. (1) In an “ideal” system (i.e. free banking) there would be an increase in the money supply in response to an increase in the demand to hold it. In other words the banking system would ensure that MV is stable. (2) In the present system, the costs of attempting to “do nothing” are higher than the costs of attempting to simulate a free banking system, even though you can’t do this perfectly. Therefore if V increases the Fed should increase M. Hence there is “a case” for QE.
Many Austrians deny the first point, and so it is obvious that they would reject the second. Peter Boettke is right to say that the second point doesn’t necessarily follow from the first (although I’m not totally sure if he fully agrees with the first point himself). But – and let’s take it as given that the first point is accepted – here are a few things to consider when thinking about the second point:
- As George says, the Fed is always doing something. “Do nothing” is not an option.
- If we don’t possess the knowledge required to know when the Fed should increase M, how can we possess the knowledge to declare that they were increasing it too much during the boom? If we literally have no idea whether money is too tight or too loose, surely this dramatically reduces the plausibility of using ABC as an explanation for the underlying cause of the crisis?
- NGDP is a better way to infer the monetary stance than consumer prices, or real GDP. Therefore thinking in terms of NGDP targets as opposed to inflation targeting is worthwhile.
- Market monetarism seeks to replace all discretionary monetary policy with a very simple rule. Targeting NGDP expectations is a contemporary version of a Friedman rule and also can be seen as a step towards free banking. Of all the monetary policy rule on the table, it’s hard to beat. *If* you want to have some policy relevance, this is where the action is. It directly leads to an acknowledgement that monetary policy should be neutral, and that it should distinguish between productivity shocks and reductions in AD. It would be a massive improvement over the status quo, albeit we’d remain a long way from the ideal.
- Even if you think there’s a case for the Fed to increase M, there’s a number of ways to go about doing it. QE is not necessarily the best. The likes of George, Steve Horwitz, etc, have been very clear from the start that QE as implemented by the Fed has been an error. And particularly on the Robust Political Economy grounds that Pete raised. There are two questions to consider: by how much do you want to increase M? and how? QE as practiced has dramatically increase Fed discretion and could be opposed on those grounds alone. It’s also not been accompanied by an effective communication strategy, meaning its supposed effectiveness has been curtailed. I’ve been in print myself arguing against it on both grounds (i.e. undesirability, and that it will fail on its own terms).
Finally, I sense that Pete (and many other Austrians) accept the basic arguments put forward above but just can’t bring themselves to be seen to be endorsing any action of a government agency. The analogy I use here is that the state is like a wife beater. We all see the damage being done but for whatever reason the person being beaten always offers forgiveness and a belief that things will improve over time. In which case the bystander/economist has two options. You could try to minimise the harm being caused. Or you could try to engineer an event so catastrophic she finally confronts the problem.
Maybe if the Fed tried to “do nothing” in 2008 there would have been such a crisis that faith in central banking would be completely shattered, and we would usher in a new era of free banking. In which case maybe +10% unemployment and a breakdown in monetary calculation “would be worth it”. But holy shit! Maybe if that had occurred it’d have been used as a reason to have an even more centrally planned economy, because instead of putting forward the ideas of liberty in a pragmatic, policy-oriented public debate, our best and brightest are too busy seeking the luxury of irrelevance!
I say this as someone who’s turned down opportunities to discuss the evils of central banking on TV because I know full well an uncharitable audience would fail to understand that you simply cannot spent 10 minutes defining terms and explaining caveats in a brief live interview. Bravo to anyone who has the courage to state their case publicly.
I can sleep at night because although people may mistake me as a Keynesian, a Monetarist, an endorser of monetary socialism, etc, my criticisms are more effective if they are informed criticisms; I find common ground with intellectual opponents where it exists; I have “spoken truth to power”; and I’m staying true to “good” monetary theory as I understand it. Such attacks say more about deficiencies in their knowledge than it does mine.
I have great respect for Joe Salerno and have learnt a lot from him. But I think George is right to say “there is a case for QE” and I think that needs to be opened up and discussed, not shouted down.