Thursday Idiocy: Stephen Williamson

Stephen Williamson: : What's a Central Bank Good For?:

Prescott is quoted....

It is an established scientific fact that monetary policy has had virtually no effect on output and employment in the U.S. since the formation of the Fed....

Everyone else simply says: "Prescott is wrong: that's not an established scientific fact at all."

But Williamson, somehow, cannot say that. He cannot say: "water is wet." He cannot say: "the sun rises in the east". Instead, he says that people like Prescott who say that water is dry or that the sun rises in the west are deep thinkers, serious scientists, and have a definite point--that water is dryish and the sunrise is westish if you look at it from a properly-sophisticated point of view.

This isn't just: "opinions of shape of earth differ". This is: "if you are a deep thinker, the world really is kinda flattish, isn't it?"

Ed... is a very deep thinker, and a serious scientist....

The U.S. has had a central bank only since 1914, but somehow managed to surpass the U.K... in terms of per capita income sometime during the 19th century. But maybe you think that the Fed was important as an institution for eliminating or at least mitigating the effects of financial panics.... On this, Canada is an important counterexample. There was no Canadian central bank until 1935, but Canada managed to avoid the financial panics... central banking is not necessary for development, nor... to prevent panics.

What about the Great Depression?... Cole and... Ohanian make the case that we can make sense of the Great Depression without thinking much about monetary factors, or banking.... The Great Moderation, which was supposed to have been a great victory for monetary policy... was followed by the immoderate recession of 2008-09. If we look at what explains the differences in levels of per capita income across countries, I don't think anyone argues that central banking is an important factor....

We should not be dismissive of what Prescott is saying. We need to think carefully about what our central banks are good for.

That is perhaps the craziest of the crazy: to think that Ed Prescott right now is in any sense "think[ing] carefully about what our central banks are good for.