Woodford has been arguing for some time that the balance-sheet approach is inadequate, and I agree. But why does he think QE, or at any rate expansion of the Fed’s balance sheet, is positively harmful? I’m not sure. But the discussion has led me to do something I should have done some time ago, and recast the QE debate in terms of a Tobin-style framework (pdf).
What Tobin suggested was that we think of financial market in terms of a sort of ultra-short-term equilibrium, before changing asset prices have time to have any effect on the real economy. In that case, asset prices must adjust to make people willing to hold the asset stocks currently out there; so it’s a sort of restricted general equilibrium.The PdF link Krugman supplies is to the 1969 Tobin paper that Spitnagel references. AND Krugman uses the Tobin framework to justify more quantitative easing:
On the whole, I’m sympathetic to skepticism about the effectiveness of QE, predictably. After all, I’ve been arguing for forward guidance instead for 15 years. On the other hand, right now investors are not making a clear distinction between QE and forward guidance; taper talk has been accompanied by a clear shift in expectations toward the notion that the Fed will raise short-term rates sooner rather than later. So I wouldn’t be tapering now — it sends a bad signal at a time when recovery remains very weak and fragile.
But interesting stuff, anyway — and I do love the chance to roll out my old Tobin lore.The original Tobin Q ratio is a bunch of aggregated nonsense that Mises would never go near. It's a bit of a stretch to use the Tobin framework to justify QE in the manner Krugman does, but it is far less of a stretch than Spitznagel calling the Q ratio Misesian. I think Krugman has become aware of Spitznagel's claim and is just messing with the Austrians. Though it is a huge stretch to consider Spitznagel an Austrian when he is hailing a massively aggregated data mess as Misesian.