Those worried about these possibilities say that the Federal Reserve should begin to remove its policy accommodation promptly to limit any further buildup of debt and distortions of asset prices. Most of these analysts acknowledge that such an action will entail some short-run pain - a slower recovery and a weaker rebound in labor markets.
But they see this near-term loss as more then compensated for by the long-run gain of avoiding severe problems in the more distant future. Today I would like to examine this line of reasoning. The issue may seem abstract and arcane to an audience of non-economists - inside baseball as played in the financial markets and in the Board Room of the Federal Reserve.