16 Dec 2008

Fed Slashes and Promises to Make It Stick: Let’s See if Krugman Is Right

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The Fed cut the target today down to “0 to 0.25%” and “made an explicit commitment to keeping official interest rates near rock bottom for an extended period.” This is exactly what Paul Krugman has recommended. So let’s see if it works.

My point here is that for every period where the standard “cut rates and spend a lot of borrowed money” approaches failed miserably, the Keynesians always say, “It was too little, too late.”

For example, Paul Krugman amazingly describes the Bush Administration response to all this as an example of a government too constrained by free-market ideology to actively rescue the markets. (I’m not going to bother digging up cites; I hope I didn’t shock you by claiming that he said that.)

My prediction is that the economy will still be in the john come summer. And Krugman will still be saying, “We need to take the gloves off and really stimulate this economy! Man I can’t believe how screwed up the free market can get sometimes.”

Oh, one last thing: Those who keep saying that the humungous base injections are nothing to worry about, because the wise Bernanke will suck those reserves out once the economy picks up the slack–what do you say now? Is Bernanke going to invent a way to suck out $450 billion in base money without raising the target above 0.25%?

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