Reply #51: More Krugman

[Demeter]

http://krugman.blogs.nytimes.com/2009/03/11/not-so-easing-wonkish/

Not so easing (wonkish)

There’s been a fair bit of buzz about a Goldman Sachs report (no link) suggesting that the Fed’s policy of “unconventional easing” — buying up lots of assets other than the usual Treasury bills — isn’t very effective. Specifically, GS estimates, based on market responses to Fed moves to date, that it would take between $1 trillion and $1.6 trillion of unconventional easing to accomplish as much as the Fed can achieve, in normal times, by cutting the Fed funds rate by 1 percentage point. And since GS’s estimate is that the Fed funds rate “should” be -6 percent, this means that the Fed has a problem.

One thing Noam Scheiber doesn’t mention in his summary above is the extent to which this result, if true, strikes at the heart of Ben Bernanke’s strategy for dealing with the crisis.

Intellectually, Bernanke and the Fed were prepared for this crisis — they have been gaming out what they would do if “it” happened here for years. And a key element of the strategy was altering the composition of the Fed’s balance sheet — that is, unconventional easing.

But that tool isn’t proving very potent.