In their response, they delineate specific criticisms made by specific economists before proceeding to clarify their argument:
Bold theses should receive skeptical reactions, and ours did. We argued in the New York Times that, contrary to what just about everyone believes, the financial crisis and the Great Recession that blew up the American economy in 2008 were not the necessary consequences of a housing bust. They would not have happened if the Federal Reserve had responded appropriately to increasing economic weakness over the course of that year. Barry Ritholtz (a Bloomberg View colleague), Edward Conard, Mike Konczal and Paul Krugman are among those who criticized our argument. Here we respond.
I can’t do their response justice by excerpting and summarizing, so please read the article.
However, here are some points that stuck out to me:
Our critics say or imply that our story just can’t be true: that it’s implausible that the combination of a failure to cut interest rates and some rhetoric about future monetary tightening, even if these were ill-advised, had such disastrous effects. We believe they are thinking about monetary policy too mechanically.
Under most circumstances, the difference for the economy between cutting interest rates and not cutting interest rates would be small. In most circumstances, the difference between taking antibiotics and not taking them would also be small: if, for example, you’re not sick. In certain circumstances, however, the difference is profound.
At a moment of great uncertainty, the Fed signaled that it was more likely to take action to throttle inflation — a threat markets did not believe existed — than to prevent a panic. It kept signaling it as that panic grew. And more than signaling: Even after Lehman Brothers collapsed, the Fed’s first policy change was a contractionary one. It started paying interest on excess reserves.
Several of our critics suggest that our argument amounts to saying that the Fed should have prevented a severe recession by taking quicker action, and that we are wrong to say it caused the collapse by tightening money. In truth, we pointed to Fed errors of both omission and commission, but the difference between these types of mistakes does not strike us as especially important in this context. If you don’t turn the ship’s wheel when you’re headed for an iceberg, is that “just” a failure to act?
What matters here is the underlying reality, not the words used to describe it. If our critics come to agree with us that a better Fed policy would have led to a better outcome in 2008, we can agree to disagree on terminology.