The title is the best part of my latest Mises CA, but I think I raise a decent issue in the text too. The conclusion (but I really do handle some of the nuances in the post, so critics please read the whole thing first):
Bill Gross made a very public prediction that Treasury rates would spike when QE2 ended, and (apparently) he bet a lot of money on that view. He was wrong. At the time, Krugman predicted that Gross would be wrong. Krugman was right.
However, now that Gross has left (lost?) that job at Pimco, Krugman is recounting the tale in a way that doesn’t quite work. Krugman is arguing (now) that the end of QE2 didn’t cause rates to spike, because QE2 itself never pushed rates down. But if that’s the case, then why has Krugman been freaking out so much about premature monetary tightening? Why didn’t Krugman oppose QE2 in the first place? It’s true that there are unconventional mechanisms by which the Fed can stimulate Aggregate Demand even when interest rates are already at the zero lower bound, but Krugman has several times argued that [these] mechanisms are dubious and policymakers should go with what we know works: deficit spending.
Thus we circle back to the essential problem: If Krugman is (now) arguing that QE2 never held down interest rates, why doesn’t he support Yellen undoing all the asset purchases made during QE2? It won’t make interest rates rise, right?