I really have to be quick because I need to get on the road, so I admit I’m not doing this justice. But I just want to note the progression of the argument here:
1) Ted Cruz said, “In the summer of 2008…the Federal Reserve told markets that it was shifting to a tighter monetary policy.”
2) When I asked Scott Sumner to defend that, he wrote, “Bob, I’d guess he’s responding to Fed statements that they were increasingly worried about inflation, and likely to tighten in the future. (Which of course they did.)”
So already, note that Scott has moved the goalpost. Cruz said the Fed announced it was shifting to a tighter policy, whereas Scott said the Fed told markets it likely would in the future. That’s a weaker claim.
And even that isn’t true; Scott is exaggerating (in his favor) what the Fed actually said. Here are the Fed statements from June and August of 2008: Nowhere in them do they say they are likely to tighten in the future. Notice that not only does the Fed NOT say it is likely to tighten (as Sumner erroneously claimed they said), but the Fed doesn’t even say it’s more worried about inflation than growth! And the Fed also says in these statements that it thinks the spike from energy prices is temporary, and that inflation will moderate in the future. This is remarkably dovish, given that at that point, year/year CPI inflation was the highest since the fallout from the late 1970s, except for one other period around the early 1990s recession.
3) David Beckworth defends Cruz by showing a graph plotting the difference between 1-year and shorter-dated Treasury yields. This graph shoots up in the fall of 2008, and Beckworth says that standard economic theory interprets this as saying that the markets are predicting a future hike in short rates.
Again, I’ll elaborate when I am settled at my vacation spot, but in the meantime, let me just say no, that’s a very misleading way to look at it. (I’m not accusing David–or Scott for that matter–of deliberate obfuscation. I’m saying they are so sure of their framework that they can’t see how everything is pointing against them.) Look at the chart below, where I graph the actual values of the 1-year and 1-month Treasury yields, along with the difference between them:
So the green line in the chart above is what David is focusing on. Yep, it shoots up in the fall of 2008 all right.
But why did it do that? It’s because short rates fell through the floor, while longer rates didn’t fall as much. So how in the world is this proving to us that the Fed tightened?!
I’m asking people to please review the above chronology, if you are on the fence about Market Monetarists versus orthodox Austrians. You have to turn everything upside down if you’re trying to argue that Fed tightening caused the financial crisis of 2008.