Have Most Economists been Fooled by Money?

I always find Sumner’s argument as intellectually provocative, which I like. On his latest Vox column, he argues, and once again is against the rest of mainstream economists:

“Economists need not agree…that tight money caused the current recession…they do need to find counterarguments…not rely of assumptions that have been thoroughly discredited by recent developments in monetary economics…If I am right, it was a massive intellectual failure within the economics profession, not reckless bankers, that caused the crash of 2008”

What popped into my mind soon after carefully reading this piece was ‘is it true that there has been a massive intellectual failure, or ignorance to be precise?’ Why I say ‘ignorance’ because mainstream economists thought that The Fed’s policy providing some certain amount of interest for excess reserves was negligible, while Sumner argues that it has big influence on this current crisis.

Anyway, if most mainstream macroeconomists have thought easy money as the culprit of 2008 crisis, referring to bursting asset bubble then we can say this massive intellectual failure has been persistent for so long because The Great Depression, Japan’s ‘Lost Decade’, and current economic crisis were initiated by bursting asset bubble.

Have most of the modern macroeconomists been fooled? Or is it because easy money argument the most widely accepted by public and government authorities? Or Sumner is wrong about his whole tight money argument?

By the way, there are some very fundamental yet important lessons from this small piece:

· 1. Tight or easy money cannot be measured readily, especially when using interest rate as the indicator. When interest rates are high, common misunderstanding is that money is being tight, and vice versa. This conception is somehow a big failure.

· 2.Monetary base is not a reliable indicator to GDP growth, as in great depression 1930s.

· 3.Even broader aggregates are not a more reliable indicator to GDP growth.

· 4.When we do not fully agree to market mechanism, we still need to correctly and patiently understand market signs, as commodity price, production index, and stock price indicate. At the very least, these asset prices and others which are not short-term debt based, are preferable as indicator of easy money.

5. Money does matter, indeed, if not everything. We can see how money can highly affect movement in asset prices which are capable of dragging or boosting GDP.