What did we get? Stagflation. No growth and high inflation.
Paul Volcker (with support from President Reagan and the newly Republican controlled Senate) dramatically reduced money growth, ratcheting interest rates skyward, and creating a sharp recession.
But inflation fell and has stayed under control ever since.
Now, in response to a real shock, the Fed has been pouring money into the economy and we are not getting any growth. At least this time we are not getting inflation either.
What is Christina Romer's takeaway from the historical episode I describe above? That Bernanke needs to "steal a page from the Volcker playbook" and ....... pour even more money into the economy!
People, I am not making this up.
Look, the Fed did a great job as lender of last resort in the 2008 crisis. Without their actions, I believe things would have been very much worse.
But beyond the financial panic, we have had a very adverse real shock to the economy (housing price collapse). People are not as wealthy as they thought they were by a long shot. Households are trying to de-leverage and rebuild their balance sheets. The Federal government is making it hard for them to do that by taking on ever more debt on their behalf. This isn't a nominal shock, it's a real shock.
We have no evidence that monetary policy can or should be used to attempt to offset real shocks. The Fed absolutely did their job in the crisis. They should stand ready to guard against potential deflation. But the Fed simply does not have a magic wand to "heal the economy". It's not a patient, Bernanke is not a doctor, and monetary expansion is not medicine.