I suppose the author of this article titled Running Out of Options, Euro Zone May Face a Stark Choice on the CNBC website was out of new ideas, or perhaps never heard of Dr. Scott Sumner, author of the blog The Money Illusion.

In early 2009, Dr. Sumner, a professor of economics at Bentley University in Boston, Massachusetts, and scholar of the Great Depression began writing about the monetary causes of the financial crisis and the Great Recession. Since then, he has assumed a place at the table of international macroeconomic debate from the point of view of what has been coined as Market Monetarism and has attracted several like-minded economists around the world (a few are listed in my blog roll and many more can be found by following the links on their blogs). Together, they argue that the severity of the financial crisis and the subsequent Great Recession was caused by nominal factors, and even though many central bankers, economists, and financial journalists assume that monetary policy is currently accommodative because interest rates are near zero, it is actually too restrictive given the high demand to hold money which has been traditionally offset by central banks during a downturn. Market Monetarists contend that both could have been prevented or alleviated and the recession shortened by a method of managing monetary policy known as Nominal Gross Domestic Product Level Targeting (NGDPLT) that stabilizes the path of Nominal Gross Domestic Product (NGDP) and indirectly Nominal Gross Domestic Income.

Dr. Sumner argues that Quantitative Easing (QE) did work to some small extent but failed to kick start the business cycle, and subsequently reduce unemployment closer to the Natural Rate of Unemployment, because each round was deployed by size and duration, instead of conditional based on economic factors. If QE had been extended in the latter case, it would have utilized market expectations channels to stimulate self-sustaining economic activity, reduce the amount of available excess reserves being deposited with the central bank, limited the expansion of the central bank’s balance sheet wile allowing the possibility for the Federal Funds Rate to rise above the zero lower bound sooner rather later (or who knows when – my interposition).

If you have never heard of Dr. Scott Sumner, or Market Monetarism, stop by his blog and read up on it (be sure to read his FAQ before diving into his posts or you might end up confused). It is well worth your time because you will see that the central banks all over the globe have never been out of options or “out of bullets”.

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