I just read the article.
The Heritage Foundation is a research and educational institution—a think tank—whose mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense.
That’s their mission statement, so right away you know they have a clear bias. Doesn’t make what they are saying wrong, but it explains why they attack Obama’s “failed” policies so much without mentioning Bush signed the first stimulus. Nor do they mention the Fed’s involvement with the Obama administration to try to select the correct strategy for dealing with the recession. The author seems intent on laying the blame squarely on his administration alone. What this means to me as I read it is that I have to be careful how to interpret the contents since the author wants to bias me towards a conservative viewpoint. Which I did my best to do.
While the economic theory I was putting forth is probably Keynesian (I’m not certain honestly), QE2 doesn’t seem too far off by comparison:
With a funds rate effectively at zero already, the Fed must use other tools. In particular, the Fed can purchase longer-maturity U.S. government bonds, mortgage-backed securities, or other financial instruments to increase the quantity of banking reserves directly. This is quantitative easing, and the purpose is to increase the supply of banking reserves to encourage banks to lend while putting downward pressure on longer-term interest rates to improve the incentives to borrow.
That is roughly what I was saying.
I get the impression that this is risky though, and the Fed is going to gun the engine then slam on the brakes at the first sign of life. So if the Fed does it right, we’ll get out of the mud, then get blasted by high interest rates to counter the inflation.
So when you say “wait and see” I guess we’ll see if the Fed decides to reign back inflation by targeting interest rates or the money supply (like Volcker did in the late 70s-early 80s).
Economics is a dark art.