Andy Harless and I have recently been picking on this Kocherlakota quotation:

If the FOMC hews too closely to conventional thinking, it might be inclined to keep its target rate low. That kind of reaction would simply re-enforce the deflationary expectations and lead to many years of deflation.

Let me emphasize that I do understand that there is a problem with promising low rates as far as the eye can see.  My problem with Kocherlakota is that he seems to think that the solution is tight money.  At least that’s what I infer from the totality of his comments.

I’ve been so frustrated by the events of the last few weeks that I worry I am getting too negative in my posts.  I’d like to maintain a high level of courtesy, like Tyler Cowen or Nick Rowe.  Instead I often get too sarcastic, like  .  .  .  like those other guys.

Thus I was a bit surprised, but also heartened, to read this comment from my favorite monetary blogger (and cattle herder), Nick Rowe:

That speech by Narayana Kocherlakota is really disturbing. This guy is a top macroeconomist, and he totally f***s it up. I mean totally. It wasn’t just misspeaking, because he is quite clear the second time he makes the mistake. If the natural rate of interest rises exogenously, and the Fed doesn’t raise the nominal rate in response, the result will be….DEflation! And he’s a Fed President (so presumably this guy has some sort of power over monetary policy?).

You guys in the US are so scr***d. (And maybe we up here are too, since you are so big, even though we’ve got flexible exchange rates).

He went straight from a math undergrad into a PhD. I bet that’s the problem. He missed Intro Economics. (And he has the nerve to cr*p on Intro Economics too).

If even mild-mannered Nick Rowe is this upset, then you can imagine how a hot-head like me feels.

And then there is the financial press.  Here is something Marcus sent me from the Wall Street Journal:

So what’s the problem? Here it is best to depart from monetarist terminology, with its heavy emphasis on the magical powers of the central bank. Those magical powers are highly overrated, as almost anyone who has ever run a central bank will likely tell you. The Fed can flood the banks with liquidity in an effort to stimulate economic growth (if it is willing to run the very serious risk of inflation). But that will not necessarily stimulate a demand for this money.

Correct me if I am wrong, but if the Fed is trying to boost AD, isn’t an increase in the demand for money the last thing they’d want?  More and more I just scratch my head at what I read.  From the same article:

But deflation and inflation predictions could both be right in a sense, if you aren’t too fussy about strict definitions. In the late 1970s, the last time Americans suffered from manic interventionism from Washington, we had “stagflation,” a combination of minimal economic growth and double-digit inflation. It wasn’t pretty.

Which year in the 1970s did we have deflation?  And this:

Since deflation, in simple monetarist terms, means too little money chasing too many goods, with a consequent fall in prices, the remedy should be easy. Can’t the Federal Reserve create as much money as it wants with just a few key strokes? Well, there are some things money can’t buy. In political circumstances like today’s, one of them is public confidence.

You need “confidence” to create inflation?  How much confidence did people have in Jimmy Carter?  How about the Zimbabwe central bank?  I had thought inflation was more likely to result from a lack of confidence.  I thought you got inflation by “committing to be irresponsible.”

Both of the guys I quoted are very smart–Kocherlakota is obviously far brighter than I am.  I probably agree with them both on most issues.  But money is a specialized field and I just don’t have much confidence that our decision-makers or the media people who shape the discussion are on top of this issue.  We need people who are “fussy” about definitions.  Who understand why monetary policy does seem like “magic” to the uninitiated.  Every single FOMC voter should have not only a PhD in economics but 20 years of research on monetary policy, monetary theory, and monetary history.  Not one, not two, all three areas.  It’s that important.  (For instance, does Kocherlakota know that the Fed tried Rajan’s exact proposal in 1931, they raised rates by 200 basis points when the economy was weak and rates were very low?)

Update:  I just noticed that Nick has a post with a lot of interesting discusssion.  I can see I’ll have to address this issue again tomorrow.

OK, I’m ready to throw in the towel.  I just made the mistake of checking Drudge.  His website is frequently shameless, but you have to admit he often picks up the zeitgeist.  All the news about the economy is dreary.  Then I looked at Bloomberg and here are the latest TIPS spreads:

5 year conventional T-bonds 1.33%,  Indexed bonds 0.08%,  TIPS spread 1.25%

10 year conventional T-bonds 2.50%, Indexed bonds 1.03%, TIPS spread 1.47%

Both have been falling like a stone.  This suggests that a sharp slowdown in NGDP growth is very likely.  Until now I’ve tried to remain an optimist, disappointed in the pace of recovery, but assuming that we were at least muddling forward.  But it is now clear that we are no longer recovering.

So let’s put this fiasco into perspective.  What can we compare it to?  As far as I know, there are four great recessions/depressions with near zero rates:

1.  The 1929-33 contraction

2.  The 1937-38 contraction

3.  Japan since 1994.

4.  The US since 2008.

The real economy did grow after 1938, but mild deflation continued.  A serious recovery only began with WWII intensifying in mid-1940.  Japan never really had a satisfactory recovery, although there were some reasonably good years such as 2003-07.  And of course the recovery from 1929-33 only began when the dollar was sharply devalued.  The bottom line is that zero interest rate malaises don’t seem to end like ordinary recessions; short of some sort of dramatic shock like dollar devaluation or World War, they seem to linger.  What can we learn from that? 

Before explaining my analogy (actually Nick Rowe’s analogy) considering the following paradox:

1.  Near-zero nominal rates are always associated with economic malaise: a weak economy with deflation or disinflation.  So we don’t want near-zero rates.

2.  Lowering nominal rates below zero is impossible.

3.  Directly raising nominal rates through monetary policy is contractionary, and will make the recession/deflation worse.

So what do we do?  As you know I think there is a simple answer.  Indeed I think there are lots of simple answers (massive QE, negative IOR, explicit NGDP targeting, etc.)  But I think we need to face the fact that for some reason our monetary authorities don’t see it this way.  They view all these ideas as exceedingly risky, as exceedingly reckless, as exceedingly expansionary.

Go back and review the history.  Short of World War, the only escape from zero rate deflation was in 1933, with dollar devaluation.  Your history books never gave you any idea how controversial that was.  Think about this.  FDR basically had the Federal government take over the economy through programs like the NIRA and AAA.  They controlled almost everything.  And yet there was little objection from Wall Street.  People just went along.  But dollar devaluation was different.  It wasn’t just the conservatives who were apoplectic.  The unions were opposed.  FDR saw one top economic advisor after another resign in protest.  And these were his supporters.  The program was highly successful in raising prices (and output until the NIRA raised wages 20%), but nevertheless was the most controversial thing FDR ever did.  Even more than the Court packing.

Milton Friedman once noted that ordinary people were shocked when told that unelected Fed officials were free to simple double the money supply anytime they wished.  I think the same thing is true of changing the value of the dollar, as when FDR arbitrarily decided each dollar would be worth 60 cents (in gold terms.)  People seem OK with interest rate targeting, but anything else seems radical.  But interest rate targeting doesn’t work anymore.  So we are stuck.

Nick Rowe uses the analogy of balancing a long pole in your hand.  If you want the top to go left, you move your hand right.  By analogy, if the Fed wants inflation/growth (and long term rates) to go up, they lower the fed funds rate.  But if you bump up against a tall wall, then you may not be able to move your hand in the direction required to move the pole in the other direction.  You are stuck.  The only solution is to rely on some other method–such as directly grabbing the top of the pole.

The Fed needs to raise NGDP growth by some method other than lowering nominal rates.  It is up against the wall.  That means they need some other policy tool.  It might be the printing press (QE), negative IOR, price level or NGDP targets, dollar devaluation, etc.  But it can’t be done by manipulating the fed funds rate.  And for some reason the Fed seems paralyzed.

I guess because I have spent my whole life studying unconventional policy tools, and because I never favored interest rate targeting in the first place, these alternatives don’t seem at all scary to me.  FDR created inflation when he raised the price of gold.  And the inflation basically stopped when he stopped raising the price of gold.  Excluding WWII, no one has ever overshot toward high inflation coming out of a zero rate trap.  That’s why Krugman and I can have such serene confidence that the inflation scare-mongers will be proved wrong.  I’ve seen this movie already.  Several times.

Because deflation make rates low, and leads to cash and reserve hoarding, it makes money seem really loose when it is actually very tight.  Fed officials currently argue that money is very loose.  They are wrong, but that’s what they think.  Now we need to convince conservative central bankers, who are devoted to price stability, to take what seems like ultra-loose monetary policy, and make it far looser.  The thought makes me despair.  That’s why it is so tragic that Milton Friedman died in late 2006.  He was a voice that central bankers would listen to.  He was a respected conservative.  An inflation hawk.  Regarding the Japanese malaise, he said:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

.   .   .

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

That’s right Dr. Friedman, it’s just too counter-intuitive for people to accept.  And that’s precisely why we are fated to suffer through the Great Recession.  It’s a real pity.

PS.  Nick’s analogy is in the comment section of the link.

PPS.  Andy Harless has a post showing a Fed president stumbling over the interest rate paradox discussed above.

I was reading the comment section of Will Wilkinson’s blog, and came across this assertion:

The libertarian effort to convert liberals will be about as successful as the libertarian effort to convert conservatives. Liberals would at base have to share some common ideology with libertarians for that to work, but since they don’t, it won’t.

I couldn’t disagree more strongly.  Liberaltarianism is basically libertarians attempting to knock some sense into liberals on economic issues.  As you may know, I think both left and right wing liberals have basically the same (quasi-utilitarian) values, but different worldviews.  And as you know, I think the right wing worldview is more accurate on most economic issues (although now I guess I have to exclude monetary policy.)

Let’s review what liberals used to believe, before libertarians knocked some sense into them:

1.  In the US, they believed the prices of goods and services should be set by the government.  Ditto for wages.  This took the form of the NIRA in the 1930s.  It took the form of multiple industry regulatory agencies like the ICC and CAB.  By the late 1960s and early 1970s they favored “incomes policies” which were essentially across the board wage and price controls.  Today they generally favor letting the market set wages and prices.  Very liberal Massachusetts recently abolished all rent controls.

2.  In the US, they believed the government should control entry to new industries.  They have abandoned that belief in many industries, and based on recent posts by people like Matt Yglesias, are becoming increasingly disillusioned with remaining occupational restrictions.

3.  They favored 90% tax rates on the rich.  Today they favor rates closer to 50% on the rich.

4.  In most countries liberals thought government should own large corporations.  Today most liberals around the world think large enterprises should be privatized.  Over the next few decades there will be trillions of dollars in new privatizations, and very few nationalizations.

Sure the recent crisis has created setbacks, such as the government takeover of GM.  But the long run trend around the world has been strongly liberaltarian, and will almost certainly remain so for the foreseeable future.  Just the other day Denmark decided to cut unemployment benefit eligibility from 4 years to 2 years.  Think about what that means.  Two French researchers (Algan and Cahuc) found that Danes had the most liberal/civic-minded attitudes on Earth.  They argued that Denmark was the country most suited to have social insurance programs, because the non-deserving would be less likely to abuse the programs in Denmark than in any other country.  Yet even in ultra-honest Denmark it was found that a large number of workers mysteriously found jobs immediately after their unemployment benefits ran out.  So they are cutting back.  Denmark already has the freest markets in the world, and now they are shrinking their welfare state.  No wonder the Danes are so happy, despite dreary weather.

I see people like Brink Lindsey as trying to make pragmatic libertarians better understand their role in the ongoing policy debate.  We are not engaged in some sort of Manichean struggle between good and evil.  We are trying to convince well-meaning policy wonks like Matt Yglesias of the virtues of free markets.  Whether success on that front would actually change public policy depends on how civic-minded (or “liberal” in the original sense of idealistic) the society is.  In very civic-minded societies liberaltarian ideas are accepted much more easily that in less civic-minded societies, where rent-seeking may be endemic.  In the long run, the only hope for those societies is a change in attitudes.  I believe that occurs through the narrative arts.  Progress seems slow, because the problems seem so overwhelming.  But taking the long view, the progress we have already achieved has been mind-boggling.

Good luck to Brink and Will in their new jobs.

Last night JimP sent me a chilling but persuasive article written by the WSJ’s Jon Hilsenrath.  He clearly has good sources:

WASHINGTON—The Aug. 10 meeting of top Federal Reserve officials was among the most contentious in Ben Bernanke’s four-and-a-half year tenure as central bank chairman.

With the economic outlook unexpectedly darkening, the issue was a seemingly technical one: whether to alter the way the Fed manages its huge portfolio of securities.

But it had big implications: Doing so would plunge the Fed back into the markets and might be a prelude to a future easing of monetary policy, moves that divided the men and women atop the central bank.

At least seven of the 17 Fed officials gathered around the massive oval boardroom table, made of Honduran mahogany and granite, spoke against the proposal or expressed reservations. At the end of an extended debate, Mr. Bernanke settled the issue by pushing successfully to proceed with the move.

So it’s not just three, there are no less than seven hawks among the regional Fed Presidents/Board of Governors.  Read the entire piece, it’s scary.  Lots of our most important policymakers don’t understand what the market clearly understands–we have a major AD problem.  Let’s review the facts:

1.  Between 2008:2 and 2009:2 NGDP falls by more than 8% relative to trend.

2.  Since 2009:2 NGDP has grown about 4%, which is still below trend.

3.  All signs point to a recent slowdown from the already anemic 4% rate.

4.  Unemployment is near post-war records, and is not expected to fall.

5.  Core inflation and inflation expectations are well below the Fed’s implicit 2% target, and even farther below the actual average inflation rate over recent decades, which is over 2%.

This isn’t rocket science.  When the AD curve shifts to the left then NGDP falls (relative to trend, as in the excellent Cowen/Taborrok textbook.)  That’s an adverse demand shock.  We have seven members of the Fed who don’t even seem to understand the basics of AS/AD theory.  Who have concocted all sorts of bizarre structural theories to explain away their failure to boost NGDP enough for a robust recovery.  This is EXACTLY what happened at the Fed in the Great Depression.

Some Fed members worry about keeping rates near zero because near-zero rates are often associated with deflation.  Well yes, but raising the short term policy rate doesn’t solve that problem, the Fed tried that in 1931.  They seem unaware that monetary policymakers must have two tools.  If all you have is the fed funds rate, then the price level is intermediate indeterminate.  You also need some sort of nominal target, or a Taylor-rule like reaction function.  If you want higher rates because you’ve noticed that low rates are associated with deflation (which is a reasonable thing to want), then you don’t raise the short term policy rate, you raise your nominal target.  Nick Rowe has done a lot of excellent posts on this subject.  Again, it isn’t rocket science, these principles are well understood.  But when you read comments from some Fed officials, you’d think you are listening to undergraduates trying to grasp these concepts for the first time.  And they are screwing up the entire economy!!!

When I went to bed last night I thought to myself; “Maybe it’s not this bad.  Maybe I shouldn’t freak out over a single article.  After all, I pride myself in taking my marching orders from the markets.  Let’s see how they reacted to the Wall Street Journal story.”

When I woke up this morning I noticed the markets were down sharply.  Then I saw a Yahoo.com story entitled:

Traders Freaking Out Over WSJ Report On The Fed: Here’s Why

Last night, WSJ’s John Hilsenrath reported that at the last FOMC meeting, several of the Fed governors expressed reservations about the plan to maintain the size of the balance sheet, and roll over MBS into Treasuries.

There are a lot of moving parts to the story because there are different reasons for the objections. Some of the Fed governors are hawkish (like Hoenig). Some are more dovish (like Bullard). And some think that the Fed can’t really do anything because our problems are more structural (Kocherlakota).

But here’s what folks are taking away from the article: The Fed is still way behind the curve in terms of how bad the economy is. It’s paralyzed.

It’s funny, because this is the exact opposite of what some people initially thought — there was this fear that the Fed knew something about bad news coming down the pike that the public hadn’t heard yet. In fact, as we now know, the Fed isn’t seeing what everyone else is.

Anyway, this is the talk of the morning, and it’s helping send stocks down again.

I know there will be some saying; “Sure, the stock market likes easy money, stocks are a hedge against inflation.”  Actually no.  The market did horribly in the high inflation period of 1966-81.  Here’s how I look at it:

1.  The market hated inflation in the 1970s.

2.  The market is begging for easier money today.

3.  Put 1 and 2 together–what does that tell you?

This is the last nail in the coffin of the Krugman “depression economics” theory.  Recall that that theory is based on the assumption that everything changes when rates hit zero.  Since monetary policy is (supposedly) completely ineffective, suddenly all he old Keynesian myths come true.  A fiscal multiplier.  Imports are bad.  Saving too much causes recessions.  All the prejudices of the man on the street.

Is monetary policy really ineffective at zero rates?  Try telling that to Wall Street.

PS.  For those who like black comedy, check out this Kevin Warsh statement:

An abrupt change in stance, he argued, could lead the public to believe the Fed was more worried about the economy than it really was.

Update:  I guess I am so freaked out that I have become a bit sloppy with recent posts.  I apologize.  Commenter 123 asked for an example of the interest rate fallacy cite above.  I.e., the idea that since low rates are associated with deflation, raising the short term policy rate can cure deflation.  I suppose this Kocherlakota excerpt is what I had in mind:

Long-run monetary neutrality is an uncontroversial, simple, but nonetheless profound proposition. In particular, it implies that if the FOMC maintains the fed funds rate at its current level of 0-25 basis points for too long, both anticipated and actual inflation have to become negative. Why? It’s simple arithmetic. Let’s say that the real rate of return on safe investments is 1 percent and we need to add an amount of anticipated inflation that will result in a fed funds rate of 0.25 percent. The only way to get that is to add a negative number—in this case, –0.75 percent.

To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation. The good news is that it is certainly possible to eliminate this eventuality through smart policy choices. Right now, the real safe return on short-term investments is negative because of various headwinds in the real economy. Again, using our simple arithmetic, this negative real return combined with the near-zero fed funds rate means that inflation must be positive. Eventually, the real economy will improve sufficiently that the real return to safe short-term investments will normalize at its more typical positive level. The FOMC has to be ready to increase its target rate soon thereafter.

That sounds easy—but it’s not. When real returns are normalized, inflationary expectations could well be negative, and there may still be a considerable amount of structural unemployment. If the FOMC hews too closely to conventional thinking, it might be inclined to keep its target rate low. That kind of reaction would simply re-enforce the deflationary expectations and lead to many years of deflation.

I suppose there are different ways of reading this passage, but I find the last two sentences to be very disturbing.  What do you think?  I’d rather stick with “conventional thinking.”

Update:  Andy Harless has a nice post on this quotation.

After my recent trip I was appalled to discover the number of leading conservative voices opposing monetary easing.  Even worse, many seemed to assume the Fed was already engaged in monetary stimulus.  Before considering their views, let’s examine the thoughts of the greatest conservative monetary economist of all time, Milton Friedman.  Here he discusses the zero rate problem in Japan:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

.   .   .

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

Friedman was absolutely right, near-zero interest rates are an almost foolproof indicator that money has been too tight.  Were he still alive, I can’t even imagine what he would think of the views being expressed by his fellow conservatives.  Here is Minneapolis Fed president Narayana Kocherlakota:

Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.

Actually money has been tight.  And those construction jobs were mostly lost in 2007 and early 2008, when employment was still high.  The serious unemployment problem developed in late 2008 and early 2009, and reflected a generalized drop in AD across the entire economy.  And manufacturing has also shed lots of jobs.

Update:  Regarding 2007-08, I should have specified construction jobs associated with the housing bubble.  The subsequent sharp fall in NGDP obviously cost construction jobs in commercial and industrial building.  But those were cyclical losses due to tight money, not misallocation problems.

The right seemed to have latched onto the view that since tight money can’t be the problem, it must be some mysterious “structural problem.”  Obviously there may be some structural problems, indeed I have argued that some government labor market policies are counterproductive.  But there is nothing structural that could explain the sudden dramatic jump in unemployment between 2008 and 2009. 

Even worse, we already have a perfectly good explanation for that rise in unemployment; in 2009 NGDP fell at the fastest rate since 1938.  You’d expect a massive rise in unemployment from this sort of nominal shock, even if there were no structural problems.  Now of course there is a respectable argument that the US currently faces both problems.  But economists who make that argument (e.g. Tyler Cowen) correctly note that this means we need more monetary stimulus.  They simply warn us not to expect miracles.  But unless you are an extreme RBC-type who doesn’t believe monetary shocks matter at all (and most conservatives are not) then how can one not favor monetary stimulus? 

I suppose one argument is that we are “recovering,” and hence that no more stimulus is needed.  People seem to have forgotten that deep recessions are generally followed by fast growth.  Both NGDP and RGDP growth was very fast in the first 6 quarters of recovery from the 1982 recession.  But now we are getting only 4% NGDP growth, not the 11% of the earlier recovery, so how can we expect the 7.7% RGDP growth of the recovery from 1982?  Even worse, David Beckworth presents data (from Macroeconomic Advisers) that NGDP peaked in April, and actually declined in May and June.  We may see the already anemic 2nd quarter numbers revised downward this week.  Goldman Sachs expects less than 2% growth in 2011.  And a rise in unemployment.  That’s no recovery.

If we really were facing structural problems, then on-target NGDP growth would lead to stagflation, as in the 1970s.  Conservatives keep insisting that high inflation is just around the corner, and Paul Krugman keeps making them look like fools.  This pains me because I like most conservative economists more than I like Krugman.

Friedman and Schwartz noted that in the 1930s the low interest rates and high levels of liquidity (cash and reserves hoarding) lulled people into thinking money was easy.  Thus pundits during that era pointed to all sorts of structural problems, which were actually symptoms of the Depression, not causes.  So I have been disappointed to read statements like this one from Edmund Phelps:

THE steps being taken by government officials to help the economy are based on a faulty premise. The diagnosis is that the economy is “constrained” by a deficiency of aggregate demand, the total demand for American goods and services. The officials’ prescription is to stimulate that demand, for as long as it takes, to facilitate the recovery of an otherwise undamaged economy — as if the task were to help an uninjured skater get up after a bad fall.

The prescription will fail because the diagnosis is wrong. There are no symptoms of deficient demand, like deflation, and no signs of anything like a huge liquidity shortage that could cause a deficiency. Rather, our economy is damaged by deep structural faults that no stimulus package will address — our skater has broken some bones and needs real attention.

Or William Poole:

More bond buying from the Federal Reserve won’t help the U.S. economy, because purchases can’t remedy the main problem plaguing the U.S., which is fiscal and regulatory uncertainty, former St. Louis Federal Reserve President William Poole said.

While the Fed buying more debt will bring rates down, it won’t inspire spending and lending given uncertainties in the U.S. ranging from tax cuts to health care reforms.

Or Gerald O’Driscoll:

A policy of low interest rates is a textbook response of monetary authorities to the economic weakness brought on by deficient aggregate demand. The policy is justified by pointing to various ways in which money can promote economic activity—including by stimulating investment, discouraging savings, encouraging consumption spending, and allowing individuals to lower their debt burdens by refinancing existing debt. While these effects are theoretically plausible, this textbook policy does not apply to our present situation.

First, our lingering crisis and economic weakness was brought on not by a Keynesian failure of effective demand, but by a Hayekian asset boom and bust. Second, the textbook case for low interest rates treats the policy as one of benefits without costs. No such policy exists.

Yes, Hayek did briefly oppose monetary stimulus in the early 1930s.  But in the 1970s he admitted that he had been wrong, as the problem was not simply “misallocation” resulting from an asset boom, but also insufficient nominal spending. 

Or the Wall Street Journal:

As the Bible says, we know that our redeemer liveth. And on Wall Street and Washington these days, the economic redeemer of choice is the Federal Reserve. When the Fed’s Open Market Committee meets again today, markets are expecting a move toward easier money that is supposed to prevent deflation, re-ignite a lackluster recovery, revive the jobs market, and turn water into Chateau Petrus.

It’s a tempting religion, this faith in the magical powers of Ben Bernanke and monetary policy, but it’s also dangerous. It puts far too much hope in a single policy lever, ignores the significant risks of perpetually easy money, and above all lets the political class dodge responsibility for its fiscal and regulatory policies that have become the real barrier to more robust economic growth.  .  .  .

As for the current moment, the Fed has maintained its nearly zero interest rate target for 20 months, while expanding its balance sheet by some $2 trillion. By any definition this is historically easy monetary policy, and not without costs of its own.

Not by Milton Friedman’s definition.  And then it gets worse:

This is the real root of our current economic malaise—the conceit of Congress and the White House that more government spending, taxing and rule-making can force-feed economic expansion. Now that this great government experiment is so obviously failing, the politicians and the Wall Street Keynesians who cheered the stimulus are asking the Federal Reserve to save the day. Mr. Bernanke should tell them politely but firmly that his job is to maintain a stable price level, not to turn bad policy into wine.

So that’s what it’s really all about.  I agree that Obama’s economic policies are highly counterproductive.  But unlike some conservatives I am not willing to unemploy millions of workers to win a policy argument.  I guess that’s the difference between hard core conservatives and pragmatic classical liberals like Friedman and I.  We should do the right thing and then put our trust in the democratic system.

Update:  I should clarify that my attack here was not directed at all conservatives–most are well intentioned, but rather the sentiments in the WSJ editorial.  On many policy issues I agree with the other conservatives mentioned here.

BTW, when I researched the Great Depression, I was shocked at how the conservative Wall Street establishment hated dollar devaluation, despite the fact that the stock market obviously loved it.  I noted (to myself) that “at least the modern WSJ is much better; they often use the market reaction to policy announcements as a way of establishing their likely effects.”  I guess the WSJ has reverted back to the primitive pattern of the 1930s.  “Yes, the markets are screaming for easier money, probably because it will boost the economy.  But we can’t have that because it might make Obamanomics look successful.”  Plus ca change . . .

HT:  Marcus Nunes, JimP, 123, Ryan Avent.