Under a cold turkey strategy, at each policy meeting the Federal Open Market Committee would make its best guess about where it ultimately wants the funds rate to be and would move to that rate in a single step.
A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily.
House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.
Investment banks manage to go bankrupt through their investment-banking activities, commercial banks manage to go bankrupt through their commercial-banking activities.
Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much.
The economist John Maynard Keynes said that in the long run, we are all dead. If he were around today he might say that, in the long run, we are all on Social Security and Medicare.
So it’s important, as it affects overall levels of production and employment in the U.S. There are many domestic industries doing well in the United States, notwithstanding a strong dollar.
I and others were mistaken early on in saying that the subprime crisis would be contained. The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict.
I served seven years as the chair of the Princeton economics department where I had responsibility for major policy decisions, such as whether to serve bagels or doughnuts at the department coffee hour.
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