First of all, the plot you mention is the projection after the Treasury stimulus - this has absolutely nothing to do with the Fed at all. I have never mentioned the government stimulus at all.

I am only describing the factual and operational mechanisms by which the Fed operates - none of which is "conventional wisdom". Nowhere have I tried to justify the existence of the Fed.

Now since you have brought up the subject of macroeconomics, let me impart some "conventional wisdom" to you:

It is a "testable hypothesis" which has been verified every single time a recession has happened, that the direct cause of a recession is a fall in aggregate demand - and all economists worth their salt ranging from Keynes to Friedman, from Marshall and Samuelson to Karl Marx would agree with that statement.

The reasons for fall in aggregate demand could be numerous: war, famine, change in demographics, inflation shocks, credit reduction.

A recession caused by a bursting of the credit bubble and the result negative credit shock is known as a "balance-sheet" recession where the average consumer has massive liabilities and little equity or high-quality assets left to finance those liabilities. Deleveraging is the natural process by which an economy comes out of such a recession. Lack of credit causes a decrease in puchasing power leading to a decrease in aggregate demand.

Now let's examine the Fed's function in all of this:

(a) During the credit shock: the Fed acts as the lender-of-last-resort injecting massive liquidity into the system to avoid a systemic catastrophe (to which we came very close in 2008). In 2008, banks stopped lending to each other - corporates had their credit lines closed, commercial-paper issuance went bust. Tell me, if you were a corporate in a capital-intensive business (such as GM, Ford) at that time, even an AAA-rated one, how would you find the money to finance your working capital? That's why avoiding systemic failure of the financial system was important - otherwise few corporates would have survived, let alone banks - leading to colossal unemployment.

(b) Post credit shock: So now corporate credit and interbank credit have been restored. But the end-consumer is still highly leveraged - paying interest on loans amidst an increasingly uncertain wage and unemployment backdrop. It is dangerous to provide credit to consumer when the cost of financing that credit is too high. So, the Fed tries to lower the cost of financing by lowering interest rates (to near zero) and by making a market for assets which were pulled out of the financing chain due to the market panic - namely, mortgages. However, do note that there is no net capital creation, the Fed's balance sheet has assets (mortgages, treasuries) and liabilites (cash) in equal amounts.

(c) Now the situation becomes murky. The Fed has an accommodative policy but the transmission mechanism is not working. Banks are not lending to consumers. Why? Because the recssion has started and consumer expectations for future purchases have gone down - leading to (i) a decrease in demand for credit and (ii) overall lower sales of goods and services - recession and deleveraging are now in full flow - people are starting to have to learn to live within their means.

(d) The Fed, weirdly enough, has a mandate to keep the unemployment-rate "low". Here's where I disagree with the fact that the Fed can be effective in achieving this target. Even the Fed thinks that monetary policy alone is too blunt a tool to address unemployment as a whole. Balance sheet recessions cause severe structural dislocations in the labour market limiting worker mobility. These are things that the Fed can't and shouldn't address. Even Milton Friedman concurs [1] (interestingly, Friedman was a great supporter of having a pragmatic monetary policy authority - be it the Fed, a Mickey-Mouse bank, whatever - to attenuate the variability of the natural business cycle. People invoking Friedman seem to forget that).

(e) At this stage, let's look at the chain again: Aggregate Demand <- Consumer Purchasing Power <- Consumer Credit <- Financial Credit. The right side is being taken care of by the monetary policy - but the chain breaks down in the middle. So who steps in from the left side to boost aggregate demand? Voila! - the government (and its stimulus package).

Now, the situation becomes political. The government can (i) do a massive stimulus itself targeting specific sectors it thinks that have structural issues or, (ii) cut taxes giving more purchasing power to the consumer and letting them make the consumption decision. That's all the hoopla is about - nothing more, nothing less. (In general, fiscal stimulus targeting has been done badly by the Obama government [2] )

The Fed, as far as the markets are concerned, is an apolitical observer (Bernanke is a Republican but he's the biggest dove on the FOMC!) - it has to be to maintain market stability (to see an example, a single word out of place uttered by a Central Banker can cause massive market rallies or drops - see Mario Draghi's latest ECB press conference).

Now, if you have anything useful to contribute which is substantiated by facts and logic, please do so - otherwise do not be vitriolic just because you can be so - that's extremely easy.

[1] - http://www.aeaweb.org/aer/top20/58.1.1-17.pdf
[2] - http://forums.chicagobooth.edu/faultlines?entry=52