Department of "Huh!?": Effectiveness of QE II Department
Paul Krugman has always argued that quantitative easing and other unconventional monetary policy stimulative measures are weak reeds--better than nothing, but not much better than nothing:
Does unconventional monetary policy solve the zero bound problem?: Some comments on my post on the true cost of fiscal stimulus argue that the zero lower bound aka liquidity trap isn’t really binding, because the Fed is using other measures to expand the economy. A few commenters imply that I haven’t been paying attention. Well, yes I’m aware that BB is doing a bunch of unconventional stuff. But the available — albeit thin — evidence is that it takes a huge expansion of the Fed’s balance sheet to accomplish as much as would be achieved by a quite modest cut in the Fed funds rate. And the Fed isn’t willing to expand its balance sheet to the $10 trillion or so it would take to be as expansionary as it “should” be given, say, a Taylor rule...
Now, if you prefer a different definition of a liquidity trap, OK; call our current situation a banana, instead. But changing the name does not change the essential fact--namely, conventional monetary policy has lost effectiveness. Yes, there are other things the Fed could do — and it’s doing them, on an awesome scale. But they’re controversial, precisely because, unlike conventional monetary policy, they involve picking and choosing among potentially risky investments. And there’s a much stronger case for fiscal policy than in normal times, because we don’t know how well these unconventional measures will work.
So why is a senior administration official claiming that PK said QE II was enough stimulus?
A senior Obama administration official I spoke with last October, just before QE2 was unveiled, concurred with my view that the US was in a balance sheet recession but cited an article written by Professor Paul Krugman just before our meeting as support for his position that the situation could still be dealt with using monetary policy...
I have no idea. PK does think QE II was better than nothing. But I cannot imagine how anyone reading PK could ever think he believed QE II was enough.
And why does Richard Koo believe that was Krugman's position?
I have no Ida.
This ain't rocket science, people...