Alan Blinder gets it

I caught this statement from Alan Blinder in a debate on the New York Times about teaching economics:

Remember “conventional” monetary policy? The Federal Reserve shortens recessions by creating more bank reserves (“printing money”), which fuels a multiple expansion of the money supply and credit because banks don’t want to hold excess reserves. So they get rid of them making more loans and deposits, which also lowers short-term interest rates. Compare that to current reality: Banks are content to hold over $1.6 trillion in excess reserves, short-term interest rates are stuck near zero, and Fed policy often works on long-term interest rates instead. No, this is not your father’s monetary policy, and the old ways of teaching about it simply won’t do.

25 years ago, when I was taking my intro macro economics course in college, we used the then famous Baumol and Blinder economics textbook. It’s in it’s 11th edition now! As I wrote my last post on money and banking, I consulted this book along with my B-school money and banking textbook to see what they were saying about the banking system. It was nothing like what Alan Blinder tells us today. I say "Bravo, Alan Blinder."

Clearly, Blinder sees a huge financial crisis and reflexively understands changes must be made. That’s what you want to see, 25 year-old textbooks be damned!

Love it

Source: Rethinking How We Teach Economics – NYTimes

P.S – Also see my 2010 post Why economists failed to anticipate the financial crisis.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.