OK, an admission: Sometimes it seems to me as if economists and policymakers have spent much of the past six years slowly, stumblingly figuring out stuff they would already have known if they had read my 1998 Brookings Paper (pdf) on Japan’s liquidity trap. For example, there’s been huge confusion about whether Ricardian equivalence makes fiscal policy ineffective, vast amazement that increases in the monetary base haven’t led to big increases in the broader money supply or inflation; yet that was all clear 16 years ago, once you thought hard about the Japanese trap.
And now here we go with another: the role of troubled banks. Europe has done its stress tests, which aren’t too bad; but now we’re getting worried commentary that maybe, just maybe, a clean bill of banking health won’t stop the slide into deflation.
Folks, we’ve been there; in the 90s it was conventional wisdom that Japan’s zombie banks were the problem, and that once they were fixed all would be well. But I took a hard look at the logic and evidence for that proposition (pp. 174-177), and it just didn’t hold up.
I know, I know — blowing my own horn, and all that. But if I am not for myself, who will be for me? And in any case, it has been really frustrating to watch so many people reinvent fallacies that were thoroughly refuted long ago.
Oh, and if people had read my old stuff they might have managed to avoid embarrassing themselves so much in open letters to Bernanke and suchlike.