Krugman says too early to exit crisis measures

[October 14, 2009]  SEOUL, South Korea (AP) -- Central banks should fight the urge to raise interest rates until the global economy shows stronger signs of recovery and joblessness begins to decline, Nobel Prize-winning economist Paul Krugman said Wednesday.

"Under the best of circumstances we're going to have years before we return to anything that approaches reasonable levels of employment in the major advanced economies," Krugman told the World Knowledge Forum, an annual conference sponsored by a South Korean business newspaper.

"That means staying with these very nonstandard policies for an extended period," he said. "It means keeping interest rates close to zero for a very long time."

Krugman, who teaches at Princeton University, won the Nobel Memorial Prize in Economic Sciences last year for his analysis of how economies of scale can affect international trade patterns. He also writes columns for The New York Times.

His remarks come amid a debate over "exit strategies" -- or when the extraordinary measures such as ultra low interest rates and other financial and economic support measures put in place to fight the global economic crisis should start being withdrawn.

Krugman said he is worried by the increasing number of voices calling for an end to the unconventional monetary and fiscal responses, which he credited with saving the world from sinking into depression.

"There have been some amazing statements by members of the Federal Reserve system, saying that we may need to start raising interest rates even before unemployment starts to drop," he said.

He called it "alarming because it does bring back echoes of the Great Depression."

The Federal Reserve, which has pumped over $2 trillion into the economy to spur lending and boost consumer spending, isn't expected to raise the interest rate it controls until sometime next year, at the earliest. The rate is currently at a record low near zero.

Krugman said that according to his calculations, the United States should avoid exiting from its measures until the unemployment rate falls to "roughly 7 percent, which is a development that is at least two years and probably much longer away."

The U.S. unemployment rate in September stood at 9.8 percent, the highest since 1983.

Most analysts expect the world's largest economy to keep losing jobs for several more months and the unemployment rate to peak above 10 percent by the middle of next year, even as the economy starts to recover. The last time the unemployment rate topped 10 percent was in 1982.

Krugman later told reporters he was "surprised" that Australia's central bank raised its benchmark rate last week. "I don't think that their numbers actually warrant a rate hike yet."

The Reserve Bank of Australia last week raised its cash rate to 3.25 percent from a 49-year low of 3 percent after having slashed it a total of 4.25 percentage points, saying the risk of recession had passed.

That was the first hike by a major central bank since the financial crisis worsened last fall and has spurred speculation over which central bank will be next to tighten policy.

[Associated Press; By KELLY OLSEN]

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