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Carinthium comments on After critical event W happens, they still won't believe you - Less Wrong
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Presumably the best you can do solution-wise is to try and move policy options through a series of "middle stages" towards either optimal results, or more likely the best result you can realistically get?
EDIT: Also- how DID the economists figure it out anyway? I would have thought that although circumstances can incease or reduce it inflationary effects would be inevitable if you increased the money supply that much.
When interest rates are virtually zero, cash and short-term debt become interchangeable. There's no incentive to lend your cash on a short-term basis, so people (and corporations) start holding cash as a store of value instead of lending it. (After all, you can spend cash - or, more accurately, checking account balances - directly, but you can't spend a short-term bond.) Prices don't go up if all the new money just ends up under Apple Computer's proverbial mattress instead of in the hands of someone who is going to spend it.
See also.
Sorry for the late comment but I'm just running across this thread.
But as far as I know the mainstream economists like the Fed did not predict that this would happen; they thought quantitative easing would start banks (and others with large cash balances) lending again. If banks had started lending again, by your analysis (which I agree with), we would have seen significant inflation because of the growth in the money supply.
So it looks to me like the only reason the Fed got the inflation prediction right was that they got the lending prediction wrong. I don't think that counts as an instance of "we predicted critical event W".
Demand for extremely safe assets increased (people wanted to hold more money), the same reason Treasury bonds briefly went to negative returns; demand for loans decreased and this caused destruction of money via the logic of fractional reserve banking; the shadow banking sector contracted so financial entities had to use money instead of collateral; etc.
Sorry for the late comment but I'm just running across this thread.
This is an interesting comment which I haven't seen talked about much on econblogs (or other sources of information about economics, for that matter). I understand the logic: fractional reserve banking is basically using loans as a money multiplier, so fewer loans means less multiplication, hence effectively less money supply. But it makes me wonder: what happens when the loan demand goes up again? Do you then have to reverse quantitative easing and effectively retire money to keep things in balance? Do any mainstream economists talk about that?