Krugman is reacting to Tim Geithner's argument that the Senate needs to reconfirm Ben Bernanke in order to calm the markets, and declares that the government should not base its actions on possible reaction of others:
Nobody really knows how the markets will react; the right thing, always, is to pursue policies that look right on the substance.At one level he is right; markets generally will react short-term to anything that upsets the current political calculus. However, the idea of "substance" in Krugman's Wonderland is for the government to be printing more money and for the state essentially to nationalize the markets. This is not substance, folks. It is something akin to what Hugo Chavez is doing in Venezuela, and we all know how well that is working.
Like so many Keynesian economists, Krugman looks at markets with the wisdom of John Maynard Keynes himself, who declared markets to be run by "animal spirits." To Keynes, there was no rhyme or reason to markets and furthermore, the sale of secondary assets in any kind of market had no economic value, anyway. Therefore, the markets don't tell the government what to do; the government tells the markets how to act.
So, if there is to be tyranny, he wants it to come from Washington. No doubt, Paul Krugman has the Great Wisdom necessary to run all of our economic affairs, just as the central planners of the old Soviet empire were able to do. (One of Krugman's mentors, the late Paul Samuelson, was full of praise for Soviet Socialism, all the way until the empire collapsed.)
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