When I learned my macro, it was accepted that increasing reserves of the banking system when it was already in a substantial excess reserves position would have no effect on real output; hence it was called “pushing on a string,” an expression that I believe was coined in the Great Depression with respect to the excess reserves of the day.
In the Liquidity Trap, monetary policy was considered to be useless.
Now we have the trickle up theory of asset inflation, openly acknowledged by the Fed. Janet Yellen says the trickle down happens after the trickle up. But of course, the Fed does not acknowledge that asset inflation is inflation; it’s just wealth effect. John Hussman has pointed out that even the wealth effect is caused by an illusion, that the banking system is solvent, courtesy of FAS 157. Nevertheless, the Fed feels compelled to sweep the bad assets under the carpet before they can be audited. In the end we’ll have Good Bank, Bad Bank, with the Bad Bank being the Fed.
The non-economists readers of this blog need to be aware that current Fed policy, QE, goes against everything the entire mainstream macroeconomics canon says, but you won’t find an academic economist to admit it. If they’re conservative, like the Establishment Blowhard Gregory Mankiw, they like it because it lines the pockets of their clientele, the 1 percent (the “because capitalism (the banks want it) otherwise martial law” argument). If they’re liberal, like Paul Krugman, they like it because liberals always like accommodative monetary policy; it always serves their clientele, government, through monetization of the debt.
So mainstream academic economics has aligned itself with the status quo, and established its lack of intellectual integrity beyond any doubt.
The two political parties and their mainstream economist cheerleaders both support the status quo, while the structural rot continues. You just need to know they’ve abandoned everything the discipline has been saying for over thirty years in doing so.