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1 - Introduction

Published online by Cambridge University Press:  13 May 2021

Peter J. Boettke ,
Alexander William Salter  and
Daniel J. Smith
Peter J. Boettke
Affiliation:
George Mason University, Virginia
Alexander William Salter
Affiliation:
Texas Tech University
Daniel J. Smith
Affiliation:
Middle Tennessee State University
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Summary

We provide an overview of the monetary policy failures that resulted in the 2007–2008 financial crisis and ensuing Great Recession, focusing on the United States. Before the crisis, monetary policy was too loose, which fueled the bubble. After the bubble burst, monetary policy became too tight, hindering the recovery. These failures are fundamentally due to the Federal Reserve’s discretionary monetary policy. Furthermore, the popular approach of “constrained discretion” is really just discretion. Hence, it is sensitive to all the usual problems with discretionary monetary policy. Only firm monetary rules, ones that actually bind, can maintain macroeconomic stability and prevent crises.

Keywords

2007–2008 CrisisBen BernankeClassical LiberalismConstrained DiscretionFederal ReserveFinancial CrisisGreat RecessionMonetary Rule
Type
Chapter
Information
Money and the Rule of Law
Generality and Predictability in Monetary Institutions
 , pp. 1 - 21
Publisher: Cambridge University Press
Print publication year: 2021

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