Yesterday Paul Krugman took some pot shots at an op-ed that Paul Ryan and I wrote nearly five years ago—an op-ed that was critical of quantitative easing. Here’s why Krugman missed his mark and the QE critics are correct.
The op-ed stated that QE1—the 2009 actions “in which the Fed bought not only large amounts of Treasury securities but also securities backed by private mortgages”—“failed to strengthen the economy.” Krugman claims that the only evidence we had at the time was that the economy did not strengthen. As he puts it, “when I stepped outside this morning, it was cold, so I put on a coat — but it didn’t work, because it was still cold.” But there was and is evidence, including econometric research by Johannes Stroebel and me completed in 2010–later published in the International Journal of Central Banking–and basic finance theory as explained by John Cochrane in an interview published in Econ Focus by the Richmond Fed. A short summary based on my research of the role of monetary policy in the crisis is found here. It is critical of monetary policy before and after the panic in the fall of 2008, but not during the panic.
The op-ed also said that an upcoming round of “QE2 will create more economic uncertainty, stemming mainly from reasonable doubts over whether the Fed will know exactly when and how to contract its balance sheet after such an unprecedented expansion” and that these quantitative easing operations “involved the Fed in areas of fiscal policy, such as credit allocation,” arguing that such operations were the proper role of Congress. Here Krugman simply resorts to the accusation that the article engaged “conspiracy theorizing.” This is way off. There was no mention of individuals, no mention of conspiring or even talking with other people in the op-ed. The concern clearly expressed in the oped was about the loss of central bank independence and the departure from rules-based policy—a concern expressed by many people then and now—not that there was a conspiracy.
Krugman also criticized once again a letter written on 2010 criticizing quantitative easing. I responded to that criticism here.
Update: Krugman put material from his blog post of yesterday into his NYT column today, so my response in this blog pertains to that column too.