A collapse in AD. But what caused that?
Excessively tight monetary policy. But what caused that?
Mistakes by the Fed. But what caused that?
Misdiagnosis of the crisis by most macroeconomists. But what caused that?
I’m not sure, but here’s an example from Jeffrey Sachs:
The US economic emergency in late 2008 and early 2009 wasn’t really an aggregate demand crisis but a financial crisis.
BTW, his essay makes lots of good arguments against foolish and wasteful fiscal stimulus. But that sentence really jumped out at me.
Does anyone know of a model that suggests a big drop in nominal spending causes mass unemployment when the economy is otherwise healthy, but doesn’t cause mass unemployment when the economy also has financial problems? And how would you expect a collapse of AD to affect the financial system?
HT: Liberal Roman
PS. Lars Christensen just sent me the most recent nonsense from John Tamny, the man who thinks New Keynesian inflation targeting means the Fed is trying to stabilize each and every single individual price in the economy. I kid you not. Forbes magazine continues its crusade to discredit the entire conservative movement.