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Nobel laureate Paul Krugman sees 'mania' by stocks investors, driven by a 'FOMO' market

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Key Points
  • The S&P 500 has gained more than 4% this month despite a growing number of coronavirus cases across the country.
  • "It's very hard to escape the sense that there's mania now, that this is a FOMO market," Nobel Prize-winning economist Paul Krugman told CNBC.
  • Krugman is urging policymakers to focus on getting the virus under control instead of reopening businesses too soon.

There's "mania" in the stock market as investors fear missing out on returns, according to Nobel Prize-winning economist Paul Krugman.

In a CNBC interview, Krugman said some traders have yet to grasp the extent of the economic harm from the Covid-19 pandemic as the U.S. has failed to stop the spread of the virus. 

"It's very hard to escape the sense that there's mania now, that this is a FOMO [fear of missing out] market," he said. "When you look at the way that people have piled into the stocks of bankrupt companies like Hertz there's clearly something, a bit of mania going on."

The S&P 500 has gained more than 4% this month despite a growing number of coronavirus cases across the country. Brokerage firms have reported a spike in new accounts in recent months as retail investors try to capitalize on the stock market's gains.

Krugman said some investors see no alternative to stocks since bond yields are at near record-low levels. He added big technology stocks that derive large parts of their revenues overseas have also contributed to the run-up in markets.

"They're riding on the prospects of economic recovery in Asia and Europe even as the U.S. completely mucks things up," he said.

Krugman defended the Federal Reserve's aggressive stimulus response to the pandemic, such as the central bank's purchases of corporate bond ETFs, which many analysts say have helped inflate stocks.

"I don't see what else the Fed could have done," he said. "They could not have stood by and allowed a financial crisis on top of the viral crisis, so this is what had to happen, and if there's some mania in the markets, well that's what happens."

The New York Times columnist said the conditions for a quick economic recovery are in place if policymakers would focus on getting the virus under control instead of reopening businesses like bars. He added that the economy could suffer long-term damage from school closures and the expiration of fiscal aid such as extended unemployment benefits.

Krugman said additional stimulus checks or a universal basic income would not be as helpful as targeted benefits when it comes to boosting the economic recovery. 

"What we need in this circumstance is a lot of money to a selected group of people," he said.

A big infrastructure program should be a "no-brainer" for lawmakers, Krugman said, adding the national debt isn't a concern yet.

"At this point with everything else going on, the great danger is that we spend too little, not too much," he said.

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