On all other levels, I agree with your Bernanke analysis.

$90tr probably overstates it — its an upper bound.

The idea is that banks need to put a dollar of required reserves away for every $100 of deposits. So if the $900b gets lent, that creates $899b of new deposits, which in turn get lend, which create $898b, and so on. The multiplier of 100x is basically one divided by the reserve ratio. The ratio is actually higher than 1%, but banks achieve 1% by sweeping checking deposits into interest-paying overnight balances, which carry no required reserves.

In sum it sounds like: The Fed saved the banks. But there is no real economic stimulus. The $900 billion is a backstop for the bad debt in the banking system. Because there is a recession people are saving and deleveraging, banks are deleveraging, and this is deflationary. The Fed cannot print more money for real expansion, without causing inflation, unless it withdraws the $900 billion held in reserve. A case of damned if you do and damned if you don’t.

Have I got this right?

But you’ve lost me here. What is an “an effective reserve ratio of 1%,” and why would $900 billion lead to $90 trillion in aggregate demand?

As written, that does not quite make sense to me. How about this amendment?

“tightening monetary policy sufficiently when necessary will be more difficult”

Does that make sense?

It sounds like there is an asymmetry between monetary tightening and expansion. IIUC what William White has written, tightening by raising rates would have made it *easier* to expand later if necessary. Have I got that right?

My real question is this. If future monetary tightening is problematic, does it make sense to coordinate increased fiscal stimulation, as by a jobs program, with gradual monetary tightening, so that later tightening, if necessary, would be easier to effect and less drastic in its consequences? Would such a coordination help achieve a balance between concerns about inflation and unemployment?

What we need is another $500 billion in fiscal stimulus. Half to the states for immediate backfill. Half to reduce payroll taxes for a period of time.