Elroy, Zeev, et al
re Friedman's assertion about avoiding the depression by increasing the money supply--- the banks had excess reserves equal to about one fourth of the GNP We used to use the phrase pushing on a piece of string, or a wet noodle, to describe the problem! I think Keynes called it a liquidity trap, and Hansen and others mentioned a ' mad dash to liquidity' During the depression the money was available but there was no incentive to borrow to increase capacity . Only WWII set government spending at fantastic levels [deficits equal to about one half GNP, if memory serves] and that followed by the Marshall Plan and postwar reconstruction got us out of the depression. Monetary policy went along in the issuance of Humphrey's dumpties as a last minute support for the treasury to refinance some of the debt at low rates as a result of an accord between the treasury [who wanted low rates] and the fed [pushing to let rates float up because they feared inflation]
We have not learned the lesson. Monetary policy will not get us out of trouble. Fiscal policy has been more or less politically outlawed.
Zeev is quite right, however , in suggesting that the fed needs to raise rates so as to have room to lower them , not so as to get us out of recession, but so as to allow recovery ignited by fiscal or other measures.
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