Must-Read: Paul Krugman: Rate Hike Fever

Must-Read: What did Alan Greenspan do in 1987 when the stock market suddenly dropped by 25%? He reduced short-term safe nominal interest rates by 200 basis points.

What is the equivalent policy to produce that same amount of monetary easing today, should it become appropriate–as it will, should global stock markets drop by 25%?

Paul Krugman: Rate Hike Fever: “Larry Summers argues that a Fed rate hike would be a big mistake…

…I completely agree. Yet he also suggests that the Fed ‘seems set’ to do this foolish thing. Why?… It’s not like debating monetary policy with the seventeen stooges conservatives whose doctrine tells them that fiat money will turn us into Zimbabwe… and are impervious to evidence. The Fed chair is Janet Yellen; the vice chair is Stan Fischer; both… [of] whose underlying macro worldview is… Larry’s, or mine, not least because we studied under Stan himself. So why the difference on policy?….

Something about being on the inside is making the Fedsters more rate-hike prone… [not] regular contact with Wall Street types… Larry actually has plenty of that too…. [not] extra information: basically the Fed knows no more than anyone [else]… and… Janet and Stan are smart and level-headed enough to get that….

The constant sniping against easy money… may play a role…. I also suspect… the whole culture of central banks… taking away the punch bowl… having the courage to do unpopular things…. The Fed is really, really eager to return to that position–and is, I fear, engaging in wishful thinking, believing much too readily that a return to normalcy is appropriate. It’s not. I’m with Larry here: this attitude has the makings of a big mistake. Think Japan 2000; think ECB 2011; think Sweden. Don’t do it.