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I've always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. but i had to face the fact that speculative bubbles usually are followed by recessions. my excuse has been that this was because the policy makers moved too slowly - that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum.

-Paul Krugman

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I've Always Believed That A Speculative Bubble

Paul Krugman

I've always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. but i had to face the fact that speculative bubbles usually are followed by recessions. my excuse has been that this was because the policy makers moved too slowly - that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum.

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    <p style="font-size: 1.2rem; font-style: italic; margin-bottom: 10px;">"i&#039;ve always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. but i had to face the fact that speculative bubbles usually are followed by recessions. my excuse has been that this was because the policy makers moved too slowly - that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum."</p>
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Philosophy Cutting Long

More From Paul Krugman

From the great depression, to the stagflation of the seventies, to the current economic crisis caused by the housing bubble, every economic downturn suffered by this country over the past century can be traced to federal reserve policy. the fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial 'boom' followed by a recession or depression when the fed-created bubble bursts.

Budget deficits are not caused by wild-eyed spenders, but by slow economic growth and periodic recessions. and any new recession would break all deficit records. in short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the rates now.

Once committed to fight, cut. everything else is secondary. cut. that is your duty, your purpose, your hunger. there is no rule more important, no commitment that overrides that one. cut. cut from the void, not from bewilderment. cut the enemy as quickly and directly as possible. cut decisively, resolutely. cut into the enemy’s strength. flow through the gaps in his guard. cut him. cut him down utterly. don’t allow him a breath. crush him. cut him without mercy to the depths of his spirit." -richard rahl

The lesson for asia is; if you have a central bank, have a floating exchange rate; if you want to have a fixed exchange rate, abolish your central bank and adopt a currency board instead. either extreme; a fixed exchange rate through a currency board, but no central bank, or a central bank plus truly floating exchange rates; either of those is a tenable arrangement. but a pegged exchange rate with a central bank is a recipe for trouble.

I've not won different awards - many, many times - so luckily i've practiced that whenever you are nominated for anything, you enter into this marvelous, fantabulous bubble called the bubble of nomination. the minute the envelope is opened and your name isn't called out, the bubble bursts. and no one calls you up the next day to say, 'so sorry you didn't win,' or 'you looked gorgeous - nothing. if you win, you get about another 24 hours in that lovely bubble and then - pop - you are slightly wet all over from the bubble and realize that you have to get on with real life.

The central banks cannot control interest rates. that's a mistake. they can control a particular rate, such as the federal funds rate, if they want to, but they can't control interest rates.

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