http://krugman.blogs.nytimes.com/2009/03/11/not-so-easing-wonkish/
Paul Krugman - New York Times Blog
March 11, 2009, 2:44 pm
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.