Robert Hetzel has written an outstanding new book entitled The Federal Reserve: A New History. I reviewed the book for Central Banking. Here’s an excerpt:
During 2008, the Fed overreacted to (transitory) rising energy prices, and policy became too contractionary during the early stages of the Great Recession. Just as during the Great Depression of the 1930s, policymakers misdiagnosed the core problem as the financial system, whereas the actual problem was an overly tight monetary policy.
This incorrect diagnosis of the problem led to a number of interventions into the banking system, which failed to boost the economy in late 2008. Even worse, fear of inflation led the Fed to enact some misguided contractionary policies, such as its decision in October 2008 to sharply raise the interest rate paid on bank reserves. The goal was to prevent its liquidity injections from going out and stimulating the broader economy.
The economy only began to recover in 2009, when the Fed switched from banking rescue operations to monetary stimulus. The Covid crisis saw the Fed make the exact opposite error, an overly stimulative policy that relied on the now discredited 1960s idea of a trade-off between inflation and unemployment.
In 2020, not many economists correctly diagnosed the dovish policy errors being made by the Fed. Even fewer correctly spotted the overly hawkish policy during 2008. Robert Hetzel is one of a vanishingly small number of economists who were correct on both occasions. Perhaps it’s time we started paying more attention to his views.
Hetzel’s book should become the new standard for those who wish to understand how monetary policy has shaped the economy over the past 110 years. Read the whole thing.
