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Getting it Wrong

Getting it Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy

William A. Barnett
Copyright Date: 2012
Published by: MIT Press
Pages: 360
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  • Book Info
    Getting it Wrong
    Book Description:

    Blame for the recent financial crisis and subsequent recession has commonly been assigned to everyone from Wall Street firms to individual homeowners. It has been widely argued that the crisis and recession were caused by "greed" and the failure of mainstream economics. In Getting It Wrong, leading economist William Barnett argues instead that there was too little use of the relevant economics, especially from the literature on economic measurement. Barnett contends that as financial instruments became more complex, the simple-sum monetary aggregation formulas used by central banks, including the U.S. Federal Reserve, became obsolete. Instead, a major increase in public availability of best-practice data was needed. Households, firms, and governments, lacking the requisite information, incorrectly assessed systemic risk and significantly increased their leverage and risk-taking activities. Better financial data, Barnett argues, could have signaled the misperceptions and prevented the erroneous systemic-risk assessments. When extensive, best-practice information is not available from the central bank, increased regulation can constrain the adverse consequences of ill-informed decisions. Instead, there was deregulation. The result, Barnett argues, was a worst-case toxic mix: increasing complexity of financial instruments, inadequate and poor-quality data, and declining regulation. Following his accessible narrative of the deep causes of the crisis and the long history of private and public errors, Barnett provides technical appendixes, containing the mathematical analysis supporting his arguments.

    eISBN: 978-0-262-30134-3
    Subjects: Economics, Finance

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-xii)
  3. Foreword: Macroeconomics as a Science
    (pp. xiii-xxii)
    Apostolos Serletis

    There have been dramatic advances in macroeconomics as a science during the past thirty years, but this book’s findings nevertheless provide compelling reasons to be cautious about the field’s current state of the art, the quality of data on which its conclusions are based, and the central bank policies associated with those conclusions. In this foreword, I provide my own views. In this book, the author, William A. Barnett, wrote part I without mathematics and with minimal use of technical terminology. His reason was to make part I accessible to all readers. His part II is for professionals, and uses...

  4. Preface
    (pp. xxiii-xxxii)
  5. Acknowledgments
    (pp. xxxiii-xxxiv)
  6. I The Facts without the Math

    • 1 Introduction
      (pp. 3-20)

      The recent financial crisis that began to mount in 2008 followed the “Great Moderation.” Some commentators and economists concluded that the decline in business cycle volatility during the Great Moderation should be credited to central bank countercyclical policy. As more and more economists and media people became convinced the risk of recessions had moderated, lenders and investors became willing to increase their leverage and risk-taking activities. Mortgage lenders, insurance companies, investment banking firms, and home buyers increasingly engaged in activities considered unreasonably risky prior to the Great Moderation. The Great Moderation did not primarily reflect improved monetary policy. The actual...

    • 2 Monetary Aggregation Theory
      (pp. 21-90)

      Economic measurement is a formidable subfield within the field of economics and has been evolving with increasing sophistication over more than a century. Economic measurement includes “aggregation theory” and “index-number theory.” Perhaps the most widely known applications of that subfield are the consumer price index (CPI) and the national income accounts. Economic measurement is not simply accounting. Flow of funds accounting is taken as given in economic measurement, which goes far beyond accounting and makes extensive use of economic theory. Aggregation theory can become very mathematical, but the basic ideas can be understood without the mathematics. This chapter makes the...

    • 3 The History
      (pp. 91-122)

      The systemic-risk misperceptions leading up to the current economic malaise evolved over more than three decades and accelerated during the last decade. This chapter presents the history of economic “paradoxes” associated with recent misperceptions. That history is presented in chronological order. Explaining what happened after the fact, and then saying you knew it all along, is always easier than at the time. This chapter avoids the appearance of such retrospective claims by using only the data available at the time and the results published in peer reviewed journals during each of the time periods considered, with new results left for...

    • 4 Current Policy Problems
      (pp. 123-144)

      In 2002, I was approached by the European Central Bank in Frankfurt, Germany, for assistance in producing Divisia monetary aggregates for the European Monetary Union (the EMU, also called the “euro area” or the “euro zone”). I gave a seminar there and then was employed as a consultant to work out the relevant theory. I traveled there a few times in 2002 to 2003 to meet with the relevant people and to assist in producing a Divisia database for the EMU. The opportunity presented interesting, theoretical problems I had not previously addressed. In addition, the inertia produced by a long-established...

    • 5 Summary and Conclusion
      (pp. 145-156)

      Most of the puzzles and paradoxes that have evolved in the monetary economics literature, since the early 1970s, were produced by the simple-sum monetary aggregates, which are provided officially by many central banks, including the Federal Reserve. Those puzzles and paradoxes are resolved by use of proper aggregation-theoretic monetary aggregates. Except for the Bank of England’s data, the National Bank of Poland’s data, and Bank of Israel data, official central bank data provided to the public throughout the world have not significantly improved. Nevertheless, better data do exist, available only internally within some of those central banks, such as the...

  7. II Mathematical Appendixes

    • A Monetary Aggregation Theory under Perfect Certainty
      (pp. 159-216)
    • B Discounted Capital Stock of Money with Risk Neutrality
      (pp. 217-224)
    • C Multilateral Aggregation within a Multicountry Economic Union
      (pp. 225-256)
    • D Extension to Risk Aversion
      (pp. 257-288)
    • E The Middle Ground: Understanding Divisia Aggregation
      (pp. 289-298)
  8. References
    (pp. 299-312)
  9. Index
    (pp. 313-322)