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Jeff:
Good comment.
In old-fashioned monetarism, a good bit of effort went into trying to show that velocity was "stable" in some strong sense. It would have only small random fluctuations around a stable level, or at least, growth path. Of course, this was all driven by an interest in money supply rules. Sumner lost interest in money supply rules and so is no longer worried about velocity changing. The quantity of money should adjust to offset changes in velocity.
The only sort of velocity that really matters to money-macroeconomists is the ratio between nominal income and the quantity of money. This is, the ratio between the demand for real money balances and real income. Why shouldn't the amount of wealth people want to hold in the form of those assets included as "money," be subject to change. What economist would insist that there is a stable ratio between the demand for cars and real income? Why would anyone think that having the quantity of cars grow at a slow stable rate would be a good idea?
Of course, free bankers (like you and I) have pretty much made this same adjustment. The amount of monetary liabilities created by the banking system should of course adjust according to the demand to hold them. Sumner is a bit dismissive of private competitive issue of hand-to-hand currency, but the basic impact on macro thinking is the same.
Velocity changes. Why? Well, who knows. Why shouldn't it change?
The problem, in Sumner's view is that the Fed "showed" the market that it would no longer accomodate the change in velocity. And it was that loss in credibility that caused velocity to drop a lot. Maybe something about the subprime crises caused a drop in velocity. But it was when the Fed lost "credibility" with the market, so that the market no longer believed that the Fed would offset decreaces in velocity, that velocity dropped a lot.
Also, Sumner favors nominal income targetting, so that if productivity grows faster than trend, inflation will be less than trend. I favor 3% growth in nominal expenditure, so greater than trend real income growth will cause deflation. Sumner sees no problem with that sort of deflation, though with a 5% nominal GDP growth rate, it would take really remarkable real productivity growth to generate actual deflation. But the lower inflation isn't a problem in his view. And he is open to fixed nominal income as well as the 3% growth I favor. But maybe not right now.
A great response to Sumner overall, but I hope you'll have a chance to expand upon the relevance of Aldrich-Vreeland in the next round of responses. It is one of the strongest empirical points in your comment, and might offer the possibility of a more detailed suggestion as to the best alternate response to the monetary crisis.