Liquidationists of the World, Unite!

Paul Krugman's blog
NYT

OK, so now it’s official: conservatives aren’t just against any effort to boost demand with fiscal policy, they don’t want the Fed doing anything positive, either.

This open letter to Ben Bernanke is a remarkable document, not least for who signed it. Who knew that William Kristol was an expert on monetary policy? And who thought they’d gain credibility by adding someone who declared in 2005 that we needn’t worry about low savings, because Americans were doing fine thanks to rising home prices, then declared in 2007 that there was no reason to worry about the credit market?

But the real question is, what is their model of the mess we’re in? What do they think is happening?

I know what my model is: I believe we’re suffering from a severe deleveraging shock, in which the immediate problem is to get someone to make up for the loss of debtors’ spending. (The Greek-letter and funny diagram version is coming soon.) According to that view, the Fed needs to do all it can to reduce the real rates unconstrained borrowers face, and could badly use help from fiscal policy, too. Quantitative easing is literally the least the Fed can do.

(More here.)