As readers of this blog know, I am someone who believes that the loose U.S. monetary policy of 2003-2005 was an important contributor--though not the only one--to the buildup of economic imbalances that are the source of the current economic crisis. I have also argued that a key a reason for the highly accommodative monetary policy was that the Fed, following the conventional wisdom on deflation, viewed the deflationary pressures at the time as a sign of weakened aggregate demand and acted to offset it. Though well intended, the Fed's response was highly distortionary since the deflationary pressures turned out to be driven by rapid productivity gains rather than weakened aggregate demand. The Fed, therefore, was adding significant stimulus to the economy at the same time it was being buffeted by rapid productivity gains, a surefire way to push the U.S. economy past its speed limit. What all this means is that had the Fed been better able to distinguish between malign and benign deflationary pressures some, maybe much, of the economic imbalance buildup could have been avoided. This is an important lesson from this economic crisis. It is also one that I more fully discuss in a recently published article that can be found here.