In his Monday column, the New York Times' Paul Krugman argued that "the howling of the bankers" should in no way lead the general public to support raising interest rates, as "higher rates have nothing to do with the public interest."
After outlining the principles of rate policy as proposed by Knut Wicksell, Krugman wrote that low rates are necessary to the economy, whereas the justifications for raising them keep on shifting -- from the threat of looming inflation to the claim that they "breed bubbles and crashes."
The reason behind the "ever-changing rationales for the never-changing policy demands" is that a rate hike would be a windfall for banks, given that they "make their profits by taking in deposits and lending the funds out at a higher rate of interest." Krugman continued, noting that
[t]here’s no reason to believe that what’s good for bankers is good for America. But bankers are different from you and me: they have a lot more influence. Monetary officials meet with them all the time, and in many cases expect to join their ranks when they come out on the other side of the revolving door. Also, it’s widely assumed that bankers have special expertise on economic policy, although nothing in the record supports this belief. (The bankers do, however, have excellent tailors.)
So we shouldn’t be surprised to see institutions that cater to bankers, not to mention much of the financial press, spinning elaborate justifications for a rate hike that makes no sense in terms of basic economics. And the debate of the past few months, in which the Fed has seemed weirdly eager to raise rates despite warnings from the likes of Larry Summers that it would be a terrible mistake, suggests that even U.S. monetary officials aren’t immune...
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