Quantitative easing

Bernanke will do it.  I'm sitting in an airport, so here is a very quick take.  It is cheaper and quicker than fiscal stimulus; this should have been our first move.  It is more likely to work.  There are two effects: lowering long-term interest rates and the helicopter drop of the cash.  It belies previous talk of a liquidity trap.  It does not address most of the underlying problems in the real economy and as you know I see the "sectoral shift" element of this downturn as very much underrated.  In that sense don't expect too much.  It shows that at the limit fiscal and monetary policy blur together.  The more the Fed takes on its balance sheet, the more the long-run independence of the central bank is damaged.  Monetizing so much government debt is what Third World nations do.  Draining the new money from the system will someday be a problem.  It may introduce a round of "beggar-thy-neighbor," central bank-engineered currency depreciations.  "Operation Twist," from the 1960s swapped short- for long-term assets but did not seem incredibly effective, although it was done under very different circumstances.  Trillion is the new billion.  If this fails the U.S. economy, and the stock market, will test new bottoms.  The most articulate advocate of quantitative easing is Scott Sumner.


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