Since I usually agree with David R. Henderson, I like to highlight times when I think he is either wrong or (at least) paints a misleading picture for his readers. In this post David was reviewing Alan Blinder’s new book, and wrote (quoting himself from his WSJ review):
So once the financial crisis happened, what was to be done? Mr. Blinder devotes the bulk of his book to the immediate response to the crisis as well as to ways for avoiding a repeat. He praises the Troubled Asset Relief Program and points out that the net cost of TARP to taxpayers is not the $700 billion that was budgeted for but, rather, a much more modest $32 billion. But there was another way to go, the way Alan Greenspan handled the 1987 stock market crash, the Y2K episode in 1999 and 2000, and the post-9/11 economy. That way was to have the Fed purchase Treasury bills through open-market operations to make sure the economy had ample liquidity. In all three cases, it worked.
Many people think that that’s exactly what Federal Reserve Chairman Ben Bernanke did when the crisis hit, but he did not. Mr. Blinder, to his credit, recognizes this, pointing out that, although the Fed changed its composition of assets, it had little effect on the money supply. He makes this point briefly, but in a 2011 article San Jose State University economist Jeffrey R. Hummel provides chapter and verse, noting that Mr. Bernanke took on extensive discretionary power to favor some financial assets over others. As Mr. Hummel puts it, under Mr. Bernanke “central banking has become the new central planning.” Mr. Blinder seems to sense this but, unfortunately, does not pursue the point. [Bold added by RPM.]
I explained in the comments that I couldn’t understand what David/Blinder meant by saying Bernanke’s policies had little effect on the money supply; whether we’re looking at the monetary base or M1, and whether we look at absolute or percentage increases, the spike during 2008-09 was bigger than in ’87, ’99, or ’01. Here is David’s response, but I don’t see how it helps. To say “it had little effect on the money supply” suggests to the average reader that the money supply didn’t increase as much under Bernanke as under Greenspan during the previous three crises, and that just isn’t true:
(Note that in my original comment at David’s post, I wasn’t sure about M1, but since then I checked the chart–shown above–and am now sure that not only the monetary base, but M1 also, rose more under Bernanke than it had ever done under Greenspan.)
If Blinder/David/Jeff Hummel/Scott Sumner want to argue that Bernanke’s actions haven’t done as much as the public probably thinks, I am open to hearing that. And it’s true that the financial pundits themselves can be misleading in the opposite direction–for example, the monetary base has been roughly flat since mid-2011, which is not what you might have thought if you read ZeroHedge every day.
All I’m saying is, I think we should be careful in how we describe monetary policy, especially since economists have such sharp disagreements about the proper role of monetary policy in a recession.