David Beckworth has a new post which attempts to use a VAR (vector autoregression) to estimate how much of the decline in nominal GDP was due to monetary policy, and how much was due to other factors such as the financial crisis.  Because VAR is not my area of expertise, I hope people will take this reply as merely first stab at what I hope will be an interesting conversation.  I am pretty sure that some of my commenters are more knowledgeable about VARs than I am, and I know that David is more knowledgeable.
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We know they are anxious to raise rates. Fed officials keep talking about how they’ll act aggressively when the time comes, and hint that it might be sooner that we expected.  What better time than now?  It would give Obama a chance to do another $800,000,000,000 fiscal stimulus, to once again “save or create” 3.5 million jobs.  The BLS just reported the rate of job loss, which had been slowing, is now accelerating again.  There were 200,001 jobs lost in August, and 263,000 lost in September.  Unemployment rose to 9.8%, and is headed over 10% next year.  Manufacturing orders were expected to be up 0.7% and instead fell by 0.8%.  Now’s the time!   Oh, and weekly unemployment claims were also worse that expected.  And it looks like the UAW, oops, I mean GM and Chrysler will need another bailout; expect an announcement one day after the midterm elections.  And to top it all off, here’s what the Wall Street Journal says about the new President of the Minneapolis Fed, who will soon be determining our monetary policy:

In this paper, presented at the International Monetary Fund in April, Mr. Kocherlakota argued in a very theoretical paper that instead of cutting interest rates when the housing bubble burst, the Fed should have raised them
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By “it” I mean the sharp fall in real GDP all over the world that began in August 2008.  There are two parts to my hypothesis.  One part is that the intensification of the financial crisis beginning in September 2008 was mostly caused by the sharp fall in NGDP, not foolish lending.  Lenders had a right to expect that the Fed would keep nominal GDP growing, (it had been continuously growing since 1958.)  In Part one I repeat part of my recent reply to Hamilton; those who already saw it should skip to part 2:
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Keynesians often live in a sort of alternative universe from me.  One that reminds me of my daughter’s “Opposite Day” at school.  For them, low interest rates mean easy money, for me it indicates money has been tight.  Michael Woodford likes to envision a monetary system without money, where monetary policy is all about interest rates.   I like to envision a monetary system without interest rates, to show how changes in the money supply are the essence of monetary policy.  And now Brad DeLong argues that a policy of targeting future inflation isn’t really monetary policy:

You can call Federal Reserve policies aimed at the sending of signals that alter the expected rate of future inflation “monetary policy” if you want, but then you lose analytical clarity–because the way such policies work (if they work) is not the “normal” way that “normal” monetary policy works. Normal monetary policy works by shifting the private sector’s asset holdings toward assets that people spend more readily and rapidly, thus boosting spending. Quantitative easing at the zero bound does not do that: it simply exchanges one zero-yield government asset for another. What is does do is to change bond prices, rather by raising the safe short-term nominal interest rate and thus giving people an incentive to spend the money they already have more quickly.

In contrast, I regard policies that change the expected track of the money supply and inflation to be the only reasonable definition of monetary policy.
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