In the latest issue of National Review, Ramesh Ponnuru lays out the conservative case for more expansive counter-recessionary monetary policy, as well as an argument that QE2 has been successful. Ponnuru warns that conservative fears about inflation could prove dangerous, comparing such concerns to "crying "fire" in, if not Noah's flood, at least a torrential rain."
Ponnuru's article is essentially a distillation of arguments that have been advanced by right-wing economist bloggers: Scott Sumner, David Beckworth, and Josh Hendrickson. It's not far in its logic from the backgrounder I wrote in November.
Ponnuru's argument that QE2 "worked," however, seems about as thin as similar claims about TARP or the stimulus. Here it is in its entirety:
As the market became convinced that the Fed planned to act, both expectations of inflation and expectations of real growth increased: the former indicated in the spreads between inflation-indexed bonds and non-indexed bonds, the latter in real interest rates. Nominal income thus moved closer to trend, if not as much as it would have with a bolder Fed initiative. (An explicit announcement that the Fed is willing to do what it takes to restore the trend might itself change expectations enough to make great exertions by it unnecessary.) Stocks picked up too. QE2, though flawed, worked. It began to work even before being formally implemented.
We'll see if that translates to real growth, which is the whole point. And we'll see what happens to stocks once QE2 winds down.
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