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In Which I Share Paul Krugman's Puzzlement at Ben Bernanke's Jackson Hole Speech

Yes, there are strong reasons to believe that expansionary fiscal policy (supported by monetary policy) or banking policy to deal with the household balance-sheet problem (supported by monetary policy) would be preferable ways of rebalancing aggregate demand. But as long as Boehner, Cantor, Ryan, and McConnell hold blocking positions in the Congress, expansionary fiscal policy is not going to happen, and as long as DeMarco and Geithner hold blocking positions in the bank regulatory structure, aggressive banking policy to deal with impaired household balance sheets is not going to happen either.

That leaves monetary policy: not guaranteed to work, but worth trying.

Paul Krugman:

BMy quick summary: Bernanke in the Hole. Jackson Hole, that is:

  1. Things are really, really bad.
  2. The damage is cumulative; the longer this goes on, the worse the prospects for the future.
  3. The Fed has the power to do a lot to help the economy.
  4. While you can argue that there are costs to action, the case for major costs is quite weak, and in particular much weaker than the case for major benefits.
  5. Therefore, what we at the Fed will do is, um, sit on our hands some more, and think very seriously about maybe, someday, doing something.

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