Getting it Wrong
How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy
A leading economist contends that the recent financial crisis was caused not by the failure of mainstream economics but by corrupted monetary data constructed without reference to economics.
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.
HardcoverOut of Print ISBN: 9780262016919 360 pp. | 6 in x 9 in 38 figures, 1 table
Paperback$19.75 S | £15.99 ISBN: 9780262516884 360 pp. | 6 in x 9 in 38 figures, 1 table
[A]n important contribution to our understanding of the $2 trillion meltdown.
Leading up to the financial crisis, investors displayed an incorrect assessment of systemic risk and significantly increased their leverage and risk-taking activities. Barnett documents that better Federal Reserve data could have signaled the error in that view. This error led to the credit-driven, asset-price bubble in the US housing market. He also has shown that as a result of measurement errors, monetary policy was damaged, with tragic consequences. He is the world's foremost authority in the study of monetary and financial aggregation using index number and aggregation theory.
James J. Heckman
University of Chicago and University College Dublin, Nobel Laureate in Economics
I would never fly in an airplane designed by an economist. Unfortunately, I have to live in an economy where policy makers listen to economists. Professor Barnett, a former rocket scientist, shows clearly how important it is that economists pay attention to details and teaches economists how to do far better. Until economists absorb these lessons, the policy makers they advise will be flying blind.
Kenneth L. Judd
Hoover Institution, Stanford University
Getting It Wrong is a gripping combination of colorful mini-biographies, memoir from a close witness to our financial troubles, and well-argued case for better monetary statistics. This book first makes you care about monetary aggregation and then masterfully shows you how it should be done.
Julio J. Rotemberg
William Ziegler Professor of Business Administration, Harvard Business School
Getting It Wrong is a magisterial treatment on the measurement of monetary aggregates by the world's foremost authority. Barnett informs us about how to get the measurements right. He also shows us how the Federal Reserve gets them wrong. Indeed, if Paul Volcker's dashboard would have displayed Barnett's monetary metrics, the severe 1981–82 recession might never have occurred. Alas, the Fed's money supply gauges remain in need of an overhaul by Barnett, a monetary master craftsman.
Steve H. Hanke
Professor, Johns Hopkins University, and Forbes magazine columnist
You would think that by now so much has been written about the causes of the 2007–08 financial crisis that nothing else needs to be said. This book persuasively explains why any such assumption would be wrong. It turns out that mis-measured money is another culprit that has not been given its due. Professor Barnett, in this remarkable book, corrects this oversight. Economists, public policy makers, and informed students of monetary policy will never think about the subject the same way after reading this path-breaking book.
Robert E. Litan
Kauffman Foundation Vice President for Research and Policy and Brookings Institution Senior Fellow
Getting It Wrong gives masterful insights into causes of the financial crisis beyond simplistic notions of 'greed' or 'failure of theory.' This book shows how faulty measures led to incorrect risk assessments and failure of policy makers, including the Fed. Using flawed gauges, policy makers promoted notions of a 'Great Moderation' with reduced systemic risks and thereby ended up steering markets to crisis. William Barnett, a pioneer in economic measurement theory and practice, shows us how to do it right.
Jeffrey M. Wrase
Professional Congressional Staff Member
This book is a tour de force. Barnett argues that theoreticians have provided the tools for practitioners to deliver sound macroeconomic policies. The problem is that the Fed is not producing data based on best-practice principles, thereby distorting the information set available to practitioners and leading to misguided policies, misperceptions about systemic risk, and the crisis that erupted in 2008. Barnett navigates effortlessly through the interconnections between theory and policy. The result is a compelling and fascinating study of 'what went wrong,' and the making of a modern classic in economics.
George S. Tavlas
Director General, Bank of Greece; Alternate Member, ECB Governing Council; and Editor, Open Economies Review
In this masterful book, William Barnett provides a compelling explanation of what went wrong in the years leading up to the worst financial crisis since the Great Depression, as well as a broader history of the last half-century of Federal Reserve policy-making. He presents clear and intuitive arguments to support the message that runs through his most important scholarly work—that measures of the money supply, when properly constructed, accurately and reliably describe what monetary policy is actually doing—using a separate section to fill in the details for more technically inclined readers.
Murray and Monti Professor of Economics, Boston College
This riveting read from William Barnett combines detailed and very deep knowledge of monetary history and precise economic theory, to provide a compelling personal view of the crisis in both the financial markets and in macroeconomic/monetary policy. Barnett is the leader in devising monetary aggregates, and he makes a strong case against alternative 'simple-sum' aggregators that the Fed and others employ. His attribution of partial blame to bad data and bad aggregates for the 'Great Recession' is novel, has merit, and is strongly argued. Some may argue that this too is a 'symptom' rather than a cause, of recurring 'cycles' in our type of economy, but Barnett is able to masterfully draw on his vast knowledge of many fields and his unusual command of current cultural and media influences to infuse his discussion of very deep theoretical and policy debates, making the book very readable and useful to noneconomists.
Arts and Sciences Distinguished Professor, Emory University, and Editor of Econometric Reviews
Whether you are a Wall Street professional, an academic economist, or simply interested in the Fed, Getting It Wrong is essential. William Barnett weaves personal vignettes into seminal monetary events, creating a riveting read. For the quant, Barnett—an eminent economic scientist—details his path breaking advances in monetary and financial measurement. With interest rates near record lows, Barnett's monetary theory and tools are needed more than ever for officials, investors, and the public.
President, Center for Financial Stability, Inc.
- Winner, 2012 American Publishers Award for Professional and Scholarly Excellence (PROSE Award) in Economics, presented by the Professional and Scholarly Publishing Division of the Association of American Publishers