Money in the Great Recession BUCKINGHAM STUDIES IN MONEY, BANKING AND CENTRAL BA.NKING Seri Editor: Tim Congdon CBE, Chairman, Ins1itute of [nternalional Jlonewry R.:search and Professo1~ University of Buckingham, Uniled Kingdom The Institute of International Monetary Research promotes research into how Money in the Great dc:\'elopments in banking and finance affect the wider economy. Particular attention is paid to the effect of changes in the quantity of money, on inflation and detlation, and on boom and bust. The Institute's wider aims are to enhance economic kno\\'ledge and understanding, and to seek price stability, steady Recession economic growth and high employment. The Institute is located at the University of Buckingham and helps with the university's educational role. Buckingham Studies in Money, Banking and Central Banking presents some Did a Crash in Money Growth Cause the of the Instilllte·s most important work. Contributions from scholars at other Global Slun1p? universities and research bodies. and practi tioners in finance and banking. are also welcome. for more on the Institute. see the \\·ebsit.: at www.m\·-pr.org, Edited by Tim Congdon CBE Chairman, Institute of Internatio11al 1V oneta1y R esearch and Profess01; University of Buckingham, United Kingdom BUCKINGHAM STUDIES IN MONEY, BANKING AND CENTRAL BANKING IN ASSOCIATION WITH THE INSTITUTE OF ECONOMIC AFFAIRS ~Edward Elgar ~ PUBL I SH I NG Cheltenham, UK• Northampton, MA, USA ';;' Tim Congdon 2017 Contents :-\II rights reserved. No part of this publication may be reproduced, stored 1n a retrieval S~ ' Stem or transmitted in anv form orb\' an\' means electronic mechanical o: photoco_pying, recording. -or otherwis-e without th'e prior ' List of contributors \"ll perm1ss1on ol the publisher. Foreli:ord by The Right Honourable Lord Lamont of Lern·ick Publ ished b\' ( Chancellor of the Exchequer, 1990-93) IX Ed\\'ard Elgar Publishincr Limited The L)•piatts "' Introduction: the quantity theory of money - why another 15 Lan sdown Road restatement is needed, and why it matters to the debates on the Cheltenham Great Recession Glos Gl50 ::'J,.\ UK Tim Congdon Edward Elgar Publishing. Inc. PART I WHAT WERE THE CAUSES OF THE GREAT William Pratt House RECESSION') 9 Dewey Court Northampron 'vTassachusetts 0 l 060 Introduction to Part I USA Tim Congdon What were the causes of the Great Recession·: The mainstream approach vs. the monetary interpretation 27 A catakirrue record for tl1is book Tim Congdon is a1•ailabJe from the British Library 2 The debate over " quantitative easing" in the UK's Great Recession and afterwards 57 Library of Congress Control Number: 2016962567 Tim Congdoll 3 UK broad money growth and nominal spending during the Th is book is a\'ailable electronically in the lElgaronlin e Great Recession: an analysis of the money creation process and Econom1cs subject collection -- - the role of money demand 78 DOT l 0.4337/978178.+ 71 783.+ Ryland Thomas 4 Have central banks forgotten about money? The case of the Printed on elemental chlorine free (ECF) European Central Bank, 1999-2014 101 t·ec yc led paper containing 30% Post-Consumer Waste Juan E. Castaiieda and Tim Congdon ISB\' 978 I 78 -171 782 7 (cased) !SB\" 918 I 78-171 783-! le Book) T\' pesd b) Sen·is Filrnseuing Ltd_ Stockport. Cheshire P1·inted and bclLmd in the USA I' \ l ~H o n ey in 1h e Great Recession PART ff THE FINANCIAL SYSTEM IN THE GREAT RECESSION: CULPRIT OR VICTIM'? ,.,,., Im ro duction ro Pa rt II !.).) Tim Congdon Contributors 5 The impact of the New Regulatory Wisdom on banking, credit and money: good or bad 0 137 A.dam Ridle · Philip Booth is Professor of Finance, Public Policy and Ethics at St Mary's University, Twickenham, United Kingdom. From 2002 to 2016 he \Vas 6 Why has monetary p olicy not worked as expected? Some Academic and Research Director (previously. Editorial and Programme in teracti ons between fin a ncial regulation, credit and money 155 Director) at the Institute of Economic Affairs. Previously he was Professor Charles Goodhart of Insurance and Risk Management at Cass Business School, City ~ T he Basel rules a nd the banking system: an American University, and also worked for the Bank of England as an adviser on perspective 164 financial stability. He is both an economist and a qualified actuary. S!c'rc Hanke Juan E. Castaneda is the Director of the Institute of International Monetary Research at the University of Buckingham, United Kingdom. PART TII HO\V SHOULD THE GREAT RECESSION BE He \\'aS awarded his PhD by the U ni\·ersity Aut6noma of l\:fadrid, \'IE\VED IN MONETARY THOUGHT AND Spain in 2003 and has been a lecturer in Economics at the University of HISTORY" Buckingham since 2012. Dr Castaneda has worked with and prepared reports for the European Parliament's Committee of Economic and Introduction to Part III 181 Monetary Affairs. Tim Congdon Tim Congdon is the Chairman of the Institute of International Monetary S i\'f oneta ry policy. asset prices and financial in stitutions 185 Research, which he founded in 2014. He was a member of the Treasury PlzilzjJ Boo th Panel of Independent Forecasters (the so-called ·'wise men" ) bet\1.·een 1992 9 HO\\. would Keynes have analysed the Great Recession of 2008 and 1997., \Yhich advised the Chancellor of the Exchequer on economic and 2009° 208 policy. Although most of his career has been spent as an economist in the Robert Skidelsk) City of London, he has been a visiting professor at the Cardiff Business School and the City University Business School (now the Cass Business l 0 Why Friedman and Schv,·artz's interpretation of the Great School), and he is currently a Professor of Economics at the University Depression still matters: reassessing the thesis of their 1963 of Buckingham. Professor Congdon is often regarded as the UK's leading Jlfonetary History 233 representative of "monetarist" economic thinking. Dal'id Laidler Charles Goodhart is one of the world's leading authorities on the theory !nde:r 259 and practice of central banking. He served as a member of the Bank of England's Monetary Policy Committee from June 1997 to l\fay 2000. He was Norman Sosnow Professor of Banking and Finance at the London School of Economics, United Kingdom from 1985 to 2002, and is now Emeritus Professor. Steve Hanke is a Professor of Applied Economics at the Johns Hopkins University in Baltimore, Maryland, USA. \:V.ell known for hi s work rii i1loney hz the Creal Reassion as a currency reformer in emerging economies and one of the world's authoritie s on currency boards and dollarization. he is the Director of the Troubled Currencies Project at the Cato Institute in \:Vashington, DC. He was a senior economist with President Reagan's Council of Economic ,-'\dvi sers from 1981 to 1982, and has serYed as an adviser to heads of state in countries throughout Asia, South America, Europe and the Middle Foreword East. David Laidler is one of the world's leading figures in the monetarist tradi­ Have we learned all the lessons of the recent recession, which hit so many tion of analysing the role of money in determining inflation and short-run countries at different times after the banking crisis began in .2007'1 And economic fluctuations. The theme of Dm·id Laidler's research is summed were all the policy reactions to it correct'l E ven in .2017 it would be a bold up by the title of his 1988 presidential address to the Canadian Economic man \.vho answered those questions \vith a confident "yes.,. This ,·olume .c\ssociation, "Taking money seriously" . He was a research assistant for of essays focuses largely on the role of monetary policy. That is hardly f\<filton Friedman and Anna Schwartz's Jfonetmy History of the United surprising since it has been brought together by Tim Congdon, one of the Su11es. 1867-1960. He joined the economics faculty at the University of leading monetary economists in the UK. When I \YaS Chancellor, and in \\estern Ontario. Canada in 1975 and was Bank of Montreal Professor 1992 set up a panel of economists to advise me, of course Tim was one of there from 2000 to 2005. He is now Professor Emeritus. the automatic choices precisely because of his longstanding expertise in monetarv economics. The book has manv other distinguished contributors Adam Ridley is a British economist, civil sen ant and banker. He was and the fact that they do not agree on ali points adds to the importance of a Special Ad\·iser to the Chancellors of the Exchequer between 1979 the collection. and ! 984. and later a Director of Ham bros Bank and M organ Stanley, One of the key questions discussed is hO\V far the collapse of money Europe. In the 1990s he played a critical role in devising a settlement for in the period leading up to and during the recession \Vas similar to what the li tigation then afflicting the Lloyd's of London insurance market. The happened in the USA in the Great Depression from 1929. Further, was settlement was fo!lmYed by Ll oyd·s recoYe ry and renewal. He was Director­ it. as Friedman believed of the earlier episode, a failure of official policy, General of the London Investment Banking Association from 2000 to p~rticularly by the Federal ReserYe? Tim Congdon argues that parallels do 2005. exist between the two episodes. In the recent recess ion. too, \\·bile bankers Robert Skidelsk~ · is Ernerill1s Proressor of Pol itical Economy at Warwick and financial institutions were far from blameless in their greed and reck­ Unin:r~ it y .