Anna Schwartz was right*.  No matter how toxic the side effects or how ineffective the policies chosen by PhD Economists, they will continue to pursue them well past the point when they should be abandoned.  As a Guardian editorial observes:

The concern is that policymakers today are in denial, that they rarely acknowledge possible weaknesses in their views or, other than grudgingly, admit that they helped to cause and prolong the crisis with their ideological approach.

The latest example of this is the debate over whether or not the ECB should lower already negative interest rates further and expand its bond buying program (QE).

The argument for stopping and not doing any more goes as follows:

“With a second asset-purchase program, the ECB will continue disturbing markets, and prices do not reflect the risk anymore,” said Jürgen Stark, the ECB’s former chief economist. “All this is not thought through, ….”

So one toxic side effect of a decade plus of zero or negative interest rates was to turn the capital markets into a casino rather than a mechanism for optimally allocating capital.  It is a casino because the policies have undermined the fundamental risk/reward tradeoff that distinguishes investing from gambling.

Of course, when we are talking about PhD Economists and central bankers, this argument falls on deaf ears.

“If you don’t do anything then you don’t have any side effects, but you don’t have any impact on the economy, either,” Olli Rehn, head of Finland’s central bank and a member of the ECB’s rate-setting committee.

This was the same rationale used by Ben Bernanke when he was patting himself on the back for having the courage to act.

Of course, this rationale is fundamentally flawed, but then PhD Economists are not like Doctors.  PhD Economists never take a Hippocratic Oath and pledge not to pursue policies that damage the real economy.

*In October 2008, Anna Schwartz, a highly regarded PhD macroeconomist and Great Depression scholar, observed that fiscal stimulus and monetary accommodation were not the right policies for addressing an opacity problem in the financial system.  She then went on to say

If I regret one thing, it’s that Milton Friedman isn’t alive to see what’s happening today. It’s like the only lesson the Federal Reserve took from the Great Depression was to flood the market with liquidity. Well, it isn’t working. Professor Friedman would have enough stature to get them to listen.

She was right that she didn’t have the necessary stature to get the PhD macroeconomists at the Fed or any other central bank to listen.  They plunged ahead with their misguided policies.