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Lessons of 2008

Summary:
I have a new piece in the Cato Journal, discussing the lessons of 2008. Here is a summary: [T]here are 10 key lessons to be learned from theevents of 2008: 1. Unstable NGDP represents a failure of monetary policy.2. Never reason from a price change; focus on NGDP growth, notinflation and interest rates.3. Don’t confuse the symptoms of falling NGDP (falling assetprices and banking distress) with the cause of falling NGDP(overly tight money).4. Don’t try to predict asset price bubbles; markets are smarterthan policymakers.5. Demand-side fiscal stimulus is relatively ineffective; any taxcuts should focus on supply-side effects.6. The federal government needs to reduce moral hazard in thefinancial system by scaling back taxpayer protections on riskyloans.7. Set a

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I have a new piece in the Cato Journal, discussing the lessons of 2008. Here is a summary:

[T]here are 10 key lessons to be learned from the
events of 2008:

1. Unstable NGDP represents a failure of monetary policy.
2. Never reason from a price change; focus on NGDP growth, not
inflation and interest rates.
3. Don’t confuse the symptoms of falling NGDP (falling asset
prices and banking distress) with the cause of falling NGDP
(overly tight money).
4. Don’t try to predict asset price bubbles; markets are smarter
than policymakers.
5. Demand-side fiscal stimulus is relatively ineffective; any tax
cuts should focus on supply-side effects.
6. The federal government needs to reduce moral hazard in the
financial system by scaling back taxpayer protections on risky
loans.
7. Set a target path for the level of NGDP, perhaps growing at
4 percent per year.
8. Do whatever it takes to equate the forecast of NGDP growth
with the policy target.
9. Rely on market forecasts of nominal variables such as inflation
and NGDP, not internal Fed forecasts.
10. Do not pay interest on bank reserves during an economic
slump.

Lessons of 2008

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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