In the first, 1922 edition of Money, his own now-classic primer on monetary economics, the great Dennis Robertson included a chapter he called “Money in the Great Muddle,” about the blow World War I dealt to England’s once (relatively) rock-solid monetary system, and to other monetary arrangements worldwide. To Money’s fourth (1947) edition, Robertson added a new chapter concerning the Great Depression and its monetary aftermath, calling it “Money in the Second Great Muddle.”
So it is with a bow to Sir Dennis — and a rueful awareness of the likelihood of still other muddles to come — that I have chosen the title for my own primer’s assessment of monetary policy surrounding the upheaval known as the Great Recession.
A primer on American monetary policy is, needless to say, no place for a detailed account of the the causes of that calamity. It ought, nonetheless, to say something about the part that monetary policy, and the Fed’s monetary policy decisions in particular, played in it.
Some Preliminaries
To get a handle on the Fed’s contribution to the crisis, one must be willing to do what all too many commentators on monetary policy seem incapable of doing, to wit: set aside the temptation to treat central banks as being congenitally prone to create too much money, or predisposed to create too little. The sad truth is that central banks are perfectly capable of creating too much money on some occasions, and too little on others, and that it isn’t at all unusual for them to sway intemperately from one off-kilter stance to the other, with scarcely a pause in between.