John Maynard Keynes once marveled at “how, starting with a mistake, a remorseless logician can end up in Bedlam.” (Bedlam was the nickname of a London madhouse.) Keynesian or New Keynesian macroeconomists who start with the mistaken premise that a central bank cannot fight recession except by lowering nominal interest rates have been remorseless logicians in Keynes’s sense. In the hope of further empowering central banks to fight recessions, presumably for the benefit of the public, they have ended up like mad social scientists with schemes that would deliberately punish the public for holding currency.
From the premise that nominal interest rates must be cut, together with the fact that nominal interest rates are currently low by historical fiat-currency standards, one readily finds that the “Zero Lower Bound” on nominal interest rates is a looming obstacle to anti-recession policy. At the ZLB the central bank supposedly “runs out of ammunition.” Economist Lawrence H. Summers, thinking of the US Federal Reserve’s policy-making under the nominal Fed Funds Rate targeting approach that it used in previous recessions, has warned that “typically interest rates come down 500 basis points to contain recessions” but “there isn’t going to be 500 basis points of room any time in the foreseeable future.” Thus central bankers “don’t really have the fuel in the tank to respond” to a new recession.