Matt Yglesias says focus on real things
Instead, everyone seems obsessed by the fluctuations of the financial markets. These are, I guess, interesting indicators. But that’s what they are at very best — aggregators of guesses about the likely future state of things. Problems don’t arise because markets are down. Markets go down, perhaps, because it seems likely that bad things are happening. In particular, if your economy grows slowly, it’s hard for financial markets to go up.
So on one level I would market the Mill/Keynes insight as noting that this is wrong. Financial markets do matter. Why they matter is a question that we still haven’t completely sorted out.
However, as a basic result there is no clean nominal/real dichotomy. Things that happen to money and money markets can affect what happens in the real world. Maybe this is because of sticky prices or a co-ordination problem or a whole host of things that we can get back to arguing about once the crisis is over.
However, that financial markets matter is an insight we can’t lose. I know Matt realizes this when it comes to the Central Bank, but remember that all Central Banks really do is intervene in financial markets. They trade one financial instrument for another. Typically currency for government debt. Yet, it has real effects.