A New York Times op-ed piece from earlier this week has reignited discussion about housing and the Federal Reserve as factors in the 2008-2009 Great Recession. Minds will differ on exactly how much of the financial crisis and economic contraction was triggered by the housing crisis. As for assigning blame to the Fed’s monetary policy, there’s a popular but misleading narrative that deserves attention: the central bank wasn’t culpable because it was cutting interest rates in late-2007 through 2008. True, but the Fed still deserves criticism based on other measures of monetary policy during that period—measures that arguably offer more insight for quantifying the central bank’s influence on the business cycle and for providing insight going forward for assessing macro risk.

In other words, the Fed funds target rate can be poor guide for evaluating monetary policy. A number of economists have made this point in recent years based on the hard data, including Bentley University’s Scott Sumner and Robert Hetzel at the Richmond Fed.

This week’s NY Times op-ed by David Beckworth and Ramesh Ponnuru draws on the growing body but often misunderstood body of research that persuasively argues that Fed did in fact keep policy too tight during 2007-2008. The numbers certainly look convincing when you look beyond the Fed funds rate. The bottom line: it’s reasonable to argue that Fed policy, once again, was a key factor in triggering the last recession. As Beckworth and Ponnuru explain:

Through acts and omissions, the Fed kept interest rates and expected interest rates higher than appropriate, depressing the economy. This point is easy to miss because the Fed lowered interest rates between September 2007 and April 2008. But raising rates is not the only route to tighter money.

Between late April and early October, the Fed kept the interest rate over which it has most direct control, the federal funds rate, at 2 percent. But when the economy weakens, the “natural” interest rate — the rate that keeps the economy on an even keel — falls. By staying in place, the Fed’s target interest rate was rising relative to that natural rate. The gap between expected interest rates and the natural rate was rising even more. Fed officials spent the late spring and summer of 2008 warning that rates would have to rise to combat inflation. Futures markets showed a sharp increase in expected interest rates.

For another perspective, consider the year-over-year changes in the real monetary base (M0) in the months leading up the Great Recession, which started in Jan. 2008, according to NBER’s business cycle dates. The chart below shows that M0 (deflated by the consumer price index) was declining well before the recession started. That’s not surprising. Year-over-year declines in M0 are a common sight during periods of US recessions across the decades.

Rudi Dornbusch quipped a number of years ago that “no postwar recovery has died in bed of old age–the Federal Reserve has murdered every one of them.” Yes, there are many catalysts that led to the Great Recession, but the evidence pointing to the Fed as a factor—perhaps the critical factor—is compelling. Arguing otherwise by citing the Fed funds rate alone is a misreading of monetary policy history. That’s more than an academic oversight since analyzing the business cycle can play a critical role in various aspects of money management.

On that note, how does M0 stack up these days? The annual growth rate for the real monetary base has recently slipped in negative territory after several years of rising sharply. Monetary policy, it seems, has turned hawkish, albeit modestly so far. But at a time of slowing economic growth, even a mild degree of monetary contraction can be problematic for the business cycle.

The larger point is that the Fed funds rate isn’t a particularly useful benchmark for evaluating the state of monetary policy. Interest rates are important, of course, but monetary policy is a subtle and complex beast and focusing on a single nominal money rate doesn’t suffice in the cause of developing useful insight. M0, on the other hand, offers a superior metric for keeping an eye on the trend in monetary liquidity. There are several other possibilities, of course, but as one relatively intuitive proxy for Fed policy there’s quite a lot of value with M0, which is why it’s on the short list of indicators in The Capital Spectator’s business-cycle analytics.

This much is clear: defining the stance of Fed policy via conventional wisdom—looking at the Fed funds rate—is seriously flawed.