Yet from late 2009 until just the other day, all the Very Serious People were mainly concerned about the possibility of surging interest rates. Why?Who are all these "Very Serious People?" It's not clear. There is a link to an article in Forbes, then he picks on Kocherlakota. Apparently PK doesn't like this part of Narayana's speech. :
To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation. The good news is that it is certainly possible to eliminate this eventuality through smart policy choices. Right now, the real safe return on short-term investments is negative because of various headwinds in the real economy. Again, using our simple arithmetic, this negative real return combined with the near-zero fed funds rate means that inflation must be positive. Eventually, the real economy will improve sufficiently that the real return to safe short-term investments will normalize at its more typical positive level. The FOMC has to be ready to increase its target rate soon thereafter.Now, this seems quite unobjectionable. The reasoning is good, and Narayana is doing the best he can to articulate this so that a lay audience can understand it - though they probably still had some trouble with it I'm sure.
That sounds easy—but it’s not. When real returns are normalized, inflationary expectations could well be negative, and there may still be a considerable amount of structural unemployment. If the FOMC hews too closely to conventional thinking, it might be inclined to keep its target rate low. That kind of reaction would simply re-enforce the deflationary expectations and lead to many years of deflation.
While this scenario is conceivable, I consider it to be a highly unlikely one. The FOMC and the Board of Governors have displayed exactly the required unconventionality in solving many seemingly intractable problems over the past three years. I am confident that the Federal Reserve will display that same attribute if this deflationary challenge should ever arise. I am sure too that households and financial markets will share my confidence—which would actually eliminate the need for the Fed to ever confront hardened deflationary expectations.
Then Krugman finishes with this:
And though the story shifts, the moral is always the same: the little people have to suffer.Of course this is just the standard Krugman narrative. (i) Set up a straw man. (ii) Beat him to death. (iii) Characterize the fight as the morally-upright PK battling the Very Serious People for the cause of the poor little people.
What we need here is something more constructive. Try to get beyond these vague calls for more Econ-101-type Keynesian intervention. Help us figure out what exactly (if anything) is ailing the economy. Show us how policy can solve the problem. Be specific. Address all the risks involved. Be more subtle.