Krugman on QE

Well, here we are: Ben Bernanke is now Master of the Universe Fed chairman, and he has just conducted an experiment — QE2 — in asset purchases. That experiment is now widely viewed as a disappointment; to the extent it worked, it did so mainly by changing expectations, and once markets realized that the Fed wasn’t actually going to sustain expansion, the expectational effects wore off.

So now we have Woodford (not a household name, but one of our leading, perhaps the leading, macro theorist working now) arguing in the FT that Bernanke needs to stop fiddling with balance sheets and start making explicit announcements about future policy. The key thing to understand, reading Woodford, is that this isn’t some shoot-from-the-hip piece, it’s the culmination of a debate that goes back more than a decade.

Meanwhile, Cullen Roche makes much the same argument, although he insists that you need MMT to make it, which would be news to Woodford (and me).

I’ve labeled this post wonkish, because it is. But this is really important. And as FT Alphaville says, all the fears about QE have been misplaced. The danger isn’t that it’s wildly inflationary; it is that it’s symbolic rather than real, at a time when we desperately need substance.