We are all the financial crisis now.
But when you have bought so much debt and created so much money that rates are near zero, the public is saturated with liquidity; from that point on, they’re holding money simply as a store of value, which makes it no different from bonds — and hence a perfect substitute for bonds. And at that point further open-market operations do nothing — they just swap one zero-interest asset for another, with no effect on anything.
So why not forget about open-market operations, and just drop the stuff from helicopters? Well, remember that at this point cash and short-term bonds are equivalent. So a helicopter drop is just like a temporary lump-sum tax cut. And we would expect people to save much or most of such a tax cut — all of it, if you believe in full Ricardian equivalence.
Ricardian equivalence refers to the suggestion that it does not matter whether a government finances its spending with debt or a tax increase, the effect on total level of demand in an economy being the same. And it doesn’t seem that we believe this at all.
Definitely difficult for the casual observer to stay out front of the forward thinking on what to do about the meltdown, especially where unemployment is the lead canary staggering out of the mine – ostensibly the easiest thing to do something about – infrastructure!
Burying billions and hiring people to dig it up would be productive, to the extent that it put money in people’s pockets, money they would then spend. But what if instead we hired people to re-build bridges, and/or faltering water and sewer systems… much less super trains.