Money in the Great Recession
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Money in the Great Recession

Did a Crash in Money Growth Cause the Global Slump?

Edited by Tim Congdon

No issue is more fundamental in contemporary macroeconomics than the causes of the recent Great Recession. The standard view is that the banks were to blame because they took on too much risk, ‘went bust’ and had to be bailed out by governments. But very few banks actually had losses in excess of their capital. The counter-argument presented in this stimulating new book is that the Great Recession was in fact caused by a collapse in the rate of change of the quantity of money. The book’s argument echoes that on the causes of the Great Depression made by Friedman and Schwartz in their classic book A Monetary History of the United States.
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Chapter 7: The Basel rules and the banking system: an American perspective

Steve Hanke

Abstract

The evidence for a medium-term relationship in the USA between changes in nominal GDP and changes in the quantity of money is compelling. But policy-makers responded to the Great Recession by pressure for higher bank capital/asset ratios. This pressure reduced the rate of money growth at just the wrong time and intensified the weakness of spending. The intellectual origins of the recapitalization demands came partly from the UK, where the Northern Rock crisis of September 2007 was seen as validating the case for more bank capital.

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