Following the Fed’s announcement that it will reduce its purchases of U.S. bonds and mortgage-backed securities by $10 billion, down to $75 billion per month, Paul Krugman implicitly admitted that the Federal Reserve causes bubbles. He commented on the “worry” that the Fed’s inflationary policy of quantitative easing (QE, i.e., money printing) “is feeding speculative bubbles” by replying that “surely that’s a feature of cheap money in general”. Here it is in context:
But why, exactly, is the Fed eager to start exiting the QE business, even as it clearly remains concerned that the economy is too weak? The official statement was uninformative. What one hears is that a fair number of people at the Fed worry that QE is feeding speculative bubbles, as investors search for yield that really isn’t there.
But surely that’s a feature of cheap money in general; the same argument could be used for raising short-term rates despite a weak economy and low inflation. In fact, that’s exactly what has been happening in Sweden, where fear of bubbles has been used to justify monetary tightening that makes no sense at all in terms of either an unemployment or an inflation target.
Notice further that Krugman is arguing that just because the Fed’s low-interest rates fuel bubbles doesn’t mean that the Fed shouldn’t continue its policy of QE to keep interest rates low.
Remember, this is the same economist who advocated following the bursting of the dot-com bubble that the Fed should print money to lower interest rates to create a housing bubble. (See my book Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis.)