Some of the points Paul Krugman makes in his response to my article in today’s Wall Street Journal criticizing unconventional monetary policy are irrelevant.  The others are wrong.

First, he goes after other people who are critical of the unconventional policy, as he has done before. He says they are wrong because inflation has not picked up yet, as he has said before.  But my concerns have been about a two-sided risk, with downside effects on the economy due to the uncertainty about the exit, the distortions of financial markets (including the Fed replacing several large markets with itself), the international repercussions which feed back on the U.S. economy, and other unintended consequences.   Unfortunately, those downside risks have panned out with a terrible economic recovery to show for it. Paul Krugman downplays this argument saying that it is just “about financial stability.” No, my concern has been about the economy and unemployment.

Second, Paul Krugman does not mention other critics who I referred to the article, such as Paul Volcker, Peter Fisher, and Raghu Rajan, who have serious misgivings about the Fed’s quantitative easing based on their own policy and market experience. It’s clearly not only an inflation worry for them.

Third, he misreads the history of the mid-1970s and how it may apply today.  At that time a consensus steadily grew around Milton Friedman’s view that monetary policy was not working in its aim to reduce unemployment. But people argued against stopping the policy because the short run costs were high, even if there were long run benefits of a new policy.

Fourth, in his long paraphrase of my argument, Krugman says that my view about the exit from unconventional policy is that “in fact it would have no cost.”  But that is precisely the opposite of what I have been saying. A major concern of mine has been the costly exit.

Fifth, he says I want to “stop it immediately.”  No, I have argued that the Fed needs to have a gradual and credible exit strategy.