Taylor agrees with Wicksell (kind of)

The Hidden Costs of Monetary Easing - John Taylor & Phil Gramm

Is this an argument against again QE3 or an argument against all discretionary monetary policy in general?  It seems like the latter.

"When the Fed must, in Chairman Ben Bernanke's words, begin "removing liquidity," by selling bonds, the external debt of the federal government will rise and the Treasury will then have to pay interest on that debt to the public. Selling a trillion dollars of Treasury bonds on the market—at the same time the government is running trillion-dollar annual deficits—will drive up interest rates, crowd out private-sector borrowers and impede the recovery...Someday, hopefully next year, the American economy will come back to life. Banks will begin to lend, the money supply will expand, and the velocity of money will rise. Unless the Fed responds by reducing its balance sheet, inflationary pressures will build rapidly.  At that point the cost of our current monetary policy will be all too clear. Like Mr. Obama's stimulus policy, Mr. Bernanke's monetary expansion will ultimately have to be paid for...The Fed softened the recession by its decisive actions during the panic of 2008, but the marginal benefits of its subsequent policy have almost certainly been small. We may find the policies that had little positive impact on the recovery will have high costs indeed when they must be reversed in a full blown expansion."

Agreed.  When the economy starts accelerating, and aggregate demand picks up, inflation may rear its ugly head (for real not imagined) and the Fed will need to tighten.  By raising interest rates the Fed will discourage private investment and consumer borrowing which will act to slow the economy down.  Slowing aggregate demand will act to stem inflation.  No argument.  Why is this anything new?  This is Wicksell 1898.  But there is nothing special about QE3 here.

The inflation hawks seem to consistently skip some important steps in the inflation process.  First high growth in the monetary base (currency + bank reserves ie what the Fed directly affects through open market operations) and reduction in the Fed Funds target rate does not necessarily lead to greater credit expansion.  It only does so if banks see creditworthy customers at the current interest rate - which may not be the case during a major recession.  These are the points made by Stiglitz Weiss and Bernanke Gertler Gilchrist.  Secondly credit only expands if there is demand for funds at any positive interest rate.  This is just Keynes liquidity trap.  Finally credit expansion does not directly lead to inflation.  Rather credit expansion leads to increased aggregate demand which in the absence of increased aggregate supply will lead to inflation.  But so long as there is significant slackness in the economy credit expansion first acts to sop up the excess capacity.  This is just basic supply and demand.

Since the financial meltdown Taylor, Cochrane, Ryan, et al have repeatedly argued that any additional steps by the Fed will lead to a disaster - mostly rampant inflation or the elusive "policy uncertainty".   Here is Rep. Ryan doubling down just last week.  OTOH Keynesians (Krugman and C.Romer) and Market Monetarists (Glasner, Sumner, et al) have argued that the Fed needed to be much more aggressive - and that with so much slackness in the economy there was little concern for inflation in the short term.   Taylor's team has been spectacularly wrong on inflation and the Keynesians and Market Monetarists have been right.  The evidence is pretty clear on this.  Will additional easing have a major impact?  That part is less clear.