The following makes me think NOT.
1. Rogoff on inflation risks:
The U.S. is now ground zero for global inflation. Faced with a vicious combination of collapsing housing prices and imploding credit markets, the Fed has been aggressively cutting interest rates to try to stave off a recession. But even if the Fed does not admit it in its forecasts, the price of this "insurance policy" will almost certainly be higher inflation down the road, and perhaps for several years.
2. Asking too much of Monetary Policy:
What's an example of a problem you can't solve with monetary policy? Suppose you were convinced that house prices in the United States were at the moment substantially higher than they should be relative to the price of other goods and services. How could that have happened, an economist would want to ask, and let's suppose that the answer is that a credit market profoundly distorted by moral hazard problems loaned vast sums to households that could not reasonably be expected to be repaid if real estate prices stopped rising. The purchase of the properties financed by those loans drove up the price of housing relative to what it would have been (and should have been) with a correctly functioning credit market, so now the relative price of housing must fall.
3. Why Monetary Policy Cannot Stabilize Asset Prices:
Whatever merits such a stabilisation policy has in theory, our research suggests that in practice, monetary policy is too blunt an instrument to be used to target asset prices – the effects on real property prices are too small, given the responses of real GDP, and they are too slow, given the responses of real equity prices. In particular, there is a risk that setting monetary policy in response to asset price movements will lead to large output losses that exceed by a wide margin those that would arise from a possible bubble burst.
Is there still any disagreement over whether the current subprime crisis is rooted in liquidity or solvency? This will probably not be settled but it's straightforward to recognize that it may well be a little of both or a lot of one and a little of another. It's hard to gauge what the Fed is trying to do but it does seem like it is trying to solve the subprime crisis as a liquidity crisis. My two cents:
1. Recognize that for some institutions that it is a solvency issue. There will be a class of securities/mortages (the ability to identify these is left to the imagination for now since I don't know) that will never ever be repaid.
2. For others, again depending on the ability to identify their class of securities, this might well be a liquidity issue.
3. Assuming that the same institutions who invested in these securities can classify them as toxic or possibly non-radioactive then a workout perhaps similar to the Resolution Trust for S&L can be created for the toxic securities (and its underlying assets -- again assuming these can be identified).
4. Issues: a) a systematic workout to avoid a spiral of declining asset prices leading to asset prices close to its class also falling leading to the "death spiral" scenario.
b) Help those that can most easily be helped first. This may well be those who are healthiest or they may well also be those that are weakest. By working through the weakest institutions first and using a small enough pool of toxic securities can avoid the death spiral scenario.
c) Institutions are not going to willingly disclose all this information. Moral suasion may have to come into play.
5. If this could be done it probably would have been done now.
Paul Krugman is right. There has not been any real meaningful analysis of the problem. His figures assume that all the toxic securities have the same demand and supply curves but it may only apply to some and differ in degrees with others. It's good to see him doing economics again.