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What's another 5 percent here or there--well, 7 percent if you want to look at the S&P 500? I, for one, don't want to look.

The stock market is now at its lowest since 1997. The flight from risk in credit markets continues unabated, with safe short-term interest rates now at zero. The end of the road for monetary policy? Not quite. What remains is "quantitative easing", which Fed vice-chairman Don Kohn referred to yesterday--and which the Fed is now conducting. A good time to re-read Ben Bernanke on the subject. In a speech from five years ago, when the subject seemed of mainly academic interest so far as the US was concerned, he explains how it works. (Thanks to Calculated Risk for the reminder.)

A quite different argument for engaging in alternative monetary policies before lowering the overnight rate all the way to zero is that the public might interpret a zero instrument rate as evidence that the central bank has "run out of ammunition." That is, low rates risk fostering the misimpression that monetary policy is ineffective. As we have stressed, that would indeed be a misimpression, as the central bank has means of providing monetary stimulus other than the conventional measure of lowering the overnight nominal interest rate. However, it is also true that the considerable uncertainty that surrounds the use of these alternative measures does make the calibration of policy actions more difficult. Moreover, given the important role for expectations in making many of these policies work, the communications challenges would be considerable. Given these risks, policymakers are well advised to act preemptively and aggressively to avoid facing the complications raised by the zero lower bound.

That was then, this is now.

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