I don’t intend to settle this debate – declaring it ‘right’ or ‘wrong’ oversimplifies what is a complex issue.
I've read a host of articles on QE2 and I do think that there's too much knee-jerking and reliance on priors. To be sure the use of QE to boost aggregate demand (rather than prevent a liquidity meltdown) is a precedent, and precedents require theological arguments*, but let's not be glib here.
I call to task economists that have continually warned of hyperinflation since the first round of QE (myself included), but I also try to make a distinction between the monetary disequilibrium approach and monetary accomodation:
There is a plausible free market argument to say that under certain institutional conditions (such as competitive banks and no moral hazard), increases in the money supply to offset changes in the demand for money would avoid adjustments having to take place through the notoriously ‘sticky’ real economy. In the same way that inflation creates real effects, so does a monetary deflation, and these effects are neither desirable nor necessary. However, whether this theoretical possibility can be acted upon is another matter. Even if central bankers had the benevolence to try to replicate markets, they most certainly do not possess the omniscience. Expecting such economists to comment on the ‘appropriate’ level of monetary expansion misunderstands the whole point.
* 2006 “ The Spread of Economic Theology: The Flat Tax” Romanian Economic and Business Review Vol. 1 No. 1 pp.41-53
Update: Chris Dillow discussed my article:
Anthony is bang right to say that you cannot buy confidence.
I quibble on just one point. Anthony says that QE increases regime uncertainty. He’s probably right. But I’m not sure it increases overall uncertainty. In the absence of QE, we’d still be uncertain about whether confidence will return and how fast the real adjustments (away from debt and construction) in the economy will take place. QE doesn’t add to this uncertainty, so much as displace a little of it; there‘s more uncertainty about policy, but less about the real economy, to the extent that the risk of a catastrophe is diminished.
If I suggested that QE increases overall uncertainty then I take it back. I consider myself one of the very few economists that takes notions of uncertainty seriously, and I simply do not believe that uncertainty exists in an aggregate form. In the same was that there's no such thing as "risk aversion" (merely "aversion to certain types of risk"), you cannot "reduce" risk - you can only move it about. And if statements such as "banks decided to take on too much risk" are meaningless, the idea that certain policies increase or reduce uncertainty in an aggregate sense are nonsense. As Chris makes clear - policies can only alter types of risk and uncertainty, and policies can only displace it.