Paul Krugman writes:
Something – most obviously, a burst bubble and/or deleveraging after a credit boom – leads to a period of very low demand, so low that even zero interest rates aren’t enough to restore full employment. Eventually, however, the shock will end. So the way out is to convince the public that there has been a regime change, that the central bank will maintain expansionary monetary policy even after the economy recovers, so as to generate high demand and some inflation.
So the way out of a recession caused by a bubble bursting, according to Krugman, is to print money out of thin air. But what caused the bubble in the first place? Well, we can consult Krugman to learn the answer. Let’s recall his record on the housing bubble. In the wake of the burst dot-com bubble, Krugman likewise advocated money printing to push down interest rates specifically in order to fuel a boom in housing. And, as Krugman has observed, the result was that “the Federal Reserve successfully replaced the technology bubble with a housing bubble”.
Thus we can see very simply that Krugman’s prescribed solution to the problem is to do even more of what caused the problem in the first place.