- | Monetary Policy Monetary Policy
- | Mercatus Original Podcasts Mercatus Original Podcasts
- | Macro Musings Macro Musings
Miles Kimball on Negative Interest Rates, Equity Requirements, and Schools of Thought in Macro
Miles Kimball is a professor of economics at the University of Michigan. He is also a research associate at The National Bureau of Economic Research. Miles writes columns for the online business magazine "Quartz," and blogs at Supply‑Side Liberal. Miles joins David on to discuss negative interest rates, how the natural rate of interest can go below zero and why central banks should act accordingly. He also makes the case for higher equity requirements for financial institutions.
Read the full episode transcript
Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].
David Beckworth: Miles, welcome to the show.
Miles Kimball: Thanks David. It's great to talk to you.
Beckworth: You have a very interesting background. As I was looking into it, you've become a macro‑economist. I would love for you to share with the audience how you become one. At what point did you know you wanted to be a macro‑economist?
Kimball: You know the answer, because it's on my blog. I have a post called, "Why I am a Macro‑economist." I was actually thinking in my second year of graduate school at Harvard, that I would be a micro theorist. I did all the microeconomic theory of field classes.
I read a paper by Martin Weitzman called, "The Foundations of Unemployment Theory." It made the very interesting point that if you didn't have increasing returns to scale, then you wouldn't have any unemployment. To not have increasing returns to scale means literally a one person firm is just as efficient as a thousand person firm, or a hundred thousand person firm.
In some areas, we actually see this. We see people doing gig work, and making things for Etsy, and so on. If all jobs were like that, there would be no such thing as unemployment. Unemployment has to do with having some production process, some technology that works better at a large scale.
You'd have to get hired by this larger organization, that's doing things at that efficient scale. That was fascinating to me, and made me want to become a macro‑economist.
Beckworth: You would call yourself a neo‑monetarist. I was looking at some of your work, and you have a paper about the basics of a neo‑monetarist model. Is that how you define yourself?
Kimball: Well, Noah Smith has convinced me that maybe I should just call myself a monetarist, that there's enough continuity with that. Now, of course, the folks who are continuous with the schools, Chicago where Milton Freedman has been, have gone off in other directions.
In many ways, the views that I have are really more consistent with those of Milton Freedman than some of the views of people who are in that continuous series at Chicago.
Beckworth: Since you have become a macro‑economist and you've been practicing, have you seen big changes in the field?
Biggest Changes in the Field of Macroeconomics
Kimball: Oh, absolutely. I got my Ph.D. from Harvard in 1987. At that time, there was really a very live debate between what we call the saltwater folks from Harvard, MIT, Berkeley, and so on versus the freshwater folks from Minnesota, Carnegie, Rochester, Chicago, and so on.
Actually, I think there's a lot of interesting history, a very recent macroeconomic thought that remains to be written. I would love to read that history myself. It seems like by and large the freshwater folks want.
I think part of the reason is that the folks who might have been doing saltwater business‑cycle theory actually went to the foundations and started doing behavioral economics and still many of them to this day mostly working on very basic foundational things about how close individuals are to being fully rational in the way we typically assume they are in the models.
My advisor was Greg Mankiw. He's still active doing saltwater macroeconomics and things like talking about inflation inertia based on the idea that people aren't always paying full attention to all the information that's out there. That certainly counts as saltwater macro, but there isn't a lot of it out there these days.
I mean, now there's a division between...I don't know if you even call it a division, but the two big branches that you see are the sort of the price models that are done in the Woodford‑style which is still a very freshwater style, and then you have the real business cycle models. Those are maybe some of the two most important variants, and they both have some real missing pieces to them.
Well, in particular, I think to understand the world, you need to have both something like sticky prices. You can have sticky prices, sticky wages, or some sort of something like what Mankiw and Reis did with sticky information would get you some things like sticky prices. You need something like that, and you also need to have investment in the model.
One of the things that really puzzles me about the history of macroeconomic thought is that Mike Woodford decided to say that investment wasn't important. OK, he has a chapter on investment, but he really wants to tame investment so much that the model acts the same as it would if it didn't have investment there at all.
Beckworth: For our listeners, Michael Woodford is the leading authority on monetary economics. Has a prior leading textbook in the field, and so what you're saying is he kind of set the tone for the rest of us, is that right?
Kimball: Oh, for monetary policy discussions, absolutely. My analogy is it's like a walled garden. There's this nicely manicured walled garden that Mike Woodford has created, and that his students and the other people he's influenced have been working in which is actually an excellent starting place.
I do think we need other perspectives on monetary policy than that. It's just one perspective, and it's not...If it were one of three perspectives that were all developed to the same extent, that would be great. There's nothing wrong with it. It's one of three perspectives, but it's not healthy to have it be so dominant as it is.
Beckworth: Well, along those lines, your former student, Noah Smith has written about how there's this revolution going on in economics. He's really referring to microeconomics. The move is toward more applied work. We've got better data, more data.
Stepping back and looking at macro, you just suggested that it's the Woodford approach that is pretty dominant. It's kind of a model driven, a dynamic stochastic general equilibrium driven framework. Do you see macro at all moving in the same direction in the future as micro?
Kimball: Well, in the most micro parts of macro, it has. You have people doing intensely data driven work on price setting. That's not...
Beckworth: We're never going to see the same type of revolution simply because we don't have the natural experiments. We don't have the same type of data that micro‑economists give. Is that a fair assessment?
Kimball: Oh, well, I don't know what...I think that data will improve in macro too. The thing is there are a lot of different countries that are doing different policies, and I think as different countries develop, and as you have monetary policy ideas spreading around the world, you get a lot of data from different countries.
Beckworth: Those kind of serve as an experiment.
Kimball: Yeah. I've had this debate with Ben Bernanke actually. He was on a podcast talking to David Wessel, and he said, oh, he didn't think that we'd break through the zero lower bound any time soon, but I think the place where he's underestimating it is he's thinking of US politics.
Monetary policy is really international. Monetary policy ideas spread throughout the world, and there are a lot of countries who are...The US doesn't need negative interest rates right now, at least not desperately so, but the Eurozone, Japan, Switzerland, Denmark and Sweden, they all need negative interest rates pretty badly.
They're the places where the new policies are happening. There's some real hope that by the time the US needs a serious negative interest rate policy in the next recession that the path will be laid out. It won't be the US leading the way. It'll be more likely Switzerland leading the way, for example.
The most likely pathway ‑‑ it's far from certain ‑‑ but if the European Central Bank keeps cutting interest rates, I would predict that the Swiss National Bank will keep cutting interest rates even lower, because people want to hold Swiss assets so much that in order to have too much in the way of funds rushing into the Swiss economy and making the franc overly expensive, they have to keep their interest rate lower than the interest rate in the Eurozone.
The Eurozone can cut its interest rate in better‑trod territory than the Swiss National Bank. The Danes and the Swedes have already gone down to minus three‑quarters of a percent. By the time they do that, the Swiss, the Danes and maybe even the Swedes will have gone down further.
Beckworth: Another development in economics, and again, going back to this bigger point as your career is as a macro‑economist has been the emergence of blogging, social media. Can you reflect how that has influenced your career? Has it been a benefit to you? Have you found it useful?
I know you've been really involved in promoting breaking through the zero lower bound. You've done a lot of it on your blog, I know you've given presentations and written papers as well. Has the blog played an important role since the crisis emerged for you?
Kimball: It's been really, really fun. It's made my life ever so much more interesting. When you really say, "What kind of career do you want to have?" This is a great career and it's gotten so much better since I started the blog.
There's a separate question we can come back to, has it put me ahead in my traditional academic career view point early. That's a very different question.
Beckworth: An assistant professor is not going to get tenured blogging.
Kimball: If I view it more broadly, has it made my career more fun, more interesting, more rewarding, and so I can accomplish more of the things I want to accomplish? Absolutely.
Beckworth: There have been others. John Taylor's blogging, John Cochrane, even Lars Svensson now and Stephen Williamson, other prominent economists like you. It seems to me that it's becoming an important part of marketing your work and also sharing your ideas, that a successful economist today really needs to be engaged in social media.
Kimball: It's part of a transformation. It's really a big thing. If I can give you a bit of an extended description of what I think about this, I think it's a big part of the future of economics.
Always things at the beginning, when they tend not to be recognized for how important they are, but just to set the stage, there are many ways in which the academic journals are dysfunctional. A lot of tendencies were there 30 years ago or so, back when I got my Ph.D. in '87, but things are more dysfunctional now.
You have less engagement in the journals with the key policy issues that people are worried about in the real world. Back when I was in graduate school, we thought it was normal if maybe a couple of papers and a couple of presentations in the macro seminar were very nuts‑and‑bolts papers directed to policy.
Nowadays, if I go to some of the top departments, I get comments like, "That was a really odd paper when you were talking about getting rid of the zero lower bound," that it wasn't some DSGE model or whatever. I think that's dysfunctional because the purpose of economics is twofold.
One is for us to understand how the world works, and obviously that's different from just understanding how our models work, though that contributes. You want to understand how the models work as many parts of understanding how the world works.
The other part is that as economists, we try to make it possible for people to get more of what they want by giving policy advice and so on. That's kind of our job, that's the job I think we've taken on as a profession.
Fortunately, this fact that the journals have become ever more dysfunctional in relation to those purposes of economics, of really understanding how the world works and helping get policy that makes it possible for human beings to get more of what they want in general, that dysfunction is going to be addressed by the blogs.
First of all, why you shouldn't underestimate them. I spent a year, I think it was 2014, reading a lot of the work of Clay Christensen, who writes very interesting things. He's actually the most famous business guru in the world. He's a Harvard Business School professor. When you hear about disruptive innovation, that phrase came from him.
He actually means something much more interesting by disruptive innovation than just a big jump of innovation. That's not what disruptive innovation is. Disruptive innovation is when you have innovation that looks lower quality than the way people are doing things to begin with. It may be cheaper, it may be easier, but it looks lower quality, and that's the way blogs are.
Clay Christensen's big theme is you shouldn't underestimate disruptive innovation. You shouldn't underestimate innovation that looks like it's lower quality because guess what, if it's cheaper, if it's easier, the quality can always gradually come up. This is what you see in blogging.
I kind of know where I fit in the history of blogging. I'm far from an innovator, far from being a pioneer in blogging. What I am is one of the many people who are taking blogging upmarket and making it so that it can challenge the academic journal articles.
Beckworth: It is interesting. Looking back, you do see the influence of blogging as far back as TARP. I remember the initial TARP plan that was put out by the treasury secretary, instantly, it was criticized in the blogosphere, and soon after that, they changed it.
I'm sure there were other things going on, as well, but even the Fed's response since the crisis, QE1, QE2, QE3, the feedback in the blogosphere, the suggestions. I'm here at the Mercatus Center, Scott Sumner's work. I do see it's a link between the engagement of these bloggers, and some of the policy responses.
It's fun to see, it may be interesting to see the Fed chair, whether it was Ben Bernanke, or Janet Yellen now, getting questions asked that were first raised in the blogosphere. That's real‑time interaction.
Kimball: Yes, I'm told there is someone on the FOMC who avidly reads the blogs. It does have an effect on the Fed, and also in general.
Let me tell you why people shouldn't underestimate the blogs. First of all, folks in government agencies read it. Not just folks in the Fed, folks in all the other government agencies ‑‑ Treasury, the CFPB. People read blogs all over in government agencies.
Secondly, there's a big age gradient. When I told people I was starting to blog, or just when people would react to it, it's just been a dramatic difference in how people react, that you can predict by their age.
Beckworth: That's interesting.
Kimball: The young economists think it's wonderful. This is a big deal. One place where we saw a big age gradient in the surveys, "we" meaning social scientists in general, was in attitudes towards gay marriage. Gay marriage, you could easily predict that would become well accepted, because young people accepted it way more than old people, and old people, you have generational replacement. Old people die, and young people come up, and become more important in society.
Actually, one of my favorite columns was actually a Christmas column, but I can't even remember the title. The point was that all you have to do...People think it's hard to change society, almost impossible. All you have to do to change society is to durably convince the young people of your view of the world. If you can convince them, and they stay convinced by the time they're older, and running the show, then things can get done. You still have all the political tactics, and so on, to get things to happen, even when most people agree that something should be done.
That precondition of having an awful lot of people agree that something can be done, that happens by convincing young people in a way that has them stay convinced later on. It's not that hard to change society if you have a lot of patience, and go about it that way.
One of the places where people are often literally short sighted is they just don't realize the importance of children and the importance of young people. It's like, "Oh, they're only graduate students." Yeah, but if you can convince a cohort of graduate students, you're going to be famous down the road, if they see things your way.
Beckworth: That speaks to the last question I had in this area. For future, young budding macro‑economists, I'm guessing you would highly recommend they get engaged in blogging, at least follow blogs, in addition to the normal learning.
Kimball: Oh, absolutely, but I'd go beyond that. Eventually, the economics departments will wake up and give people credit for blogging. Why? Because they will realize that, in fact, if they have good bloggers in their department, they will attract better graduate students, they will attract better assistant professors. This is already happening in ways people don't fully recognize.
Beckworth: You're saying one day, someone will get tenure, at least in part, based on the contributions they made through blogging?
Kimball: Absolutely. Already, it helps a lot in recruiting graduate students, and recruiting assistant professors if you had good bloggers in your department. Nobody is giving any credit for that now, but the extra addition to the department's traditional aims is already there.
I think the place where you see this most strongly is, George Mason is coming up in people's perceptions because they have so many strong bloggers. There, you have the department that's really, really followed the strategy in a big way, and it's going to help them enormously. That's an easy prediction, that they will come up in the rankings.
Beckworth: Let's switch gears here, and get to the big topic that you've really been promoting in the past few years. That is conquering the zero lower bound. Before we get into it, let's work our way into it slowly, by first asking a few beginner questions. The first one I want to ask is what is an actual interest rate?
As a macro‑economist, we often view it a little bit differently than the typical lay person. Can you explain to us what an interest rate is?
How an Economist Understands Interest Rates
Kimball: An interest rate is, the key thing is, if you give me a dollar now, how much money am I going to give you back later? Let's say a year from now. There are all kinds of arrangements that we can have, depending on supply and demand. I might say, "If you give me a dollar now, I'll give you a dollar and four cents in a year," or I could say, "Hey, if you give me a dollar now, I'll give you 98 cents in a year."
Those are both perfectly reasonable arrangements if the two parties agree. It just depends on the number of people who are eager to effectively store their money by handing it to somebody else, to get back money in the future, and the number of people who want to take in money, and use it for a year, and then give it back to somebody with some interest.
If somehow, there are an awful lot of people who want to borrow money, then you're going to have positive interest rates. The people who want to borrow money are going to have to give back more than a dollar in a year.
If, on the other hand, there are an awful lot of people who want to store their money, or lend their money, and not so many who want to borrow it, and use it for a year, then it would be totally normal for the people who want to store their money, and lend it out, to actually have to pay a bit of a price for that by getting back less than a dollar in a year.
Beckworth: I think most people understand that definition of interest rates. They think about it all the time, in terms of loans, savings. As economists, don't we often call this intertemporal price? It's how we value resources across time, at a deeper level.
Beckworth: If we go a step beyond that, we talk about something called the natural interest rate. I think that's also key to this discussion of how we break through the zero lower bound in nominal interest rates. Let's quickly go over, what is a natural interest rate, and then why is that idea important in understanding the stance of monetary policy?
Kimball: Actually, I have a blog post called, I've got the exact title, but it's something like, "The Medium‑Run and the Short‑Run Natural Interest Rate." Here, I'll get you the exact title in a second. It's called "The Medium‑Run Natural Interest Rate, and the Short‑Run Natural Interest Rate."
If you Google that, you'll immediately get to this blog post. That's really crucial. People who think there's only one natural interest rate are not going to understand what happened in the great recession. By the way, there's also a long run natural interest rate that has to do with what happens when the capital stock adjusts, but we don't have to focus on that.
Beckworth: Let's focus on, the thing about the Fed, in terms of the Fed setting a short term interest rate.
Kimball: Let me explain this. The medium‑run natural interest rate is, if the economy is going fine. The economy is fine, it's neither in a boom, nor in a recession. If the economy is going fine, at what's sometimes called full employment, but maybe full employment is not really full employment. It's about four percent unemployment or something. If the economy is going fine, the interest rate that will hold in that circumstance is the medium‑run natural interest rate.
Then, you have this phenomenon that if the economy is going badly, if you're in the midst of a recession, businesses think that's a terrible time to invest, and if they don't want to invest, they don't need to borrow as much money.
In a very straightforward way, when the economy is doing badly, the interest rate goes down. That's the concept of the short‑run natural interest rate. The short‑run natural interest rate is, given the state of the economy, in terms of being in a recession or a boom, how low would interest rates have to be to get businesses to invest?
There's always some interest rate at which businesses will invest. You make it low enough, they'll invest. In a deep recession, as we had in the aftermath of the financial crisis, the short‑run natural interest rate is really quite low. As soon as you realize the definition, how low does the interest rate have to be to get the businesses to invest, you can see why the Fed actually should have cut the interest rate, minus four percent or minus five percent.
In the next recession, they might do exactly that.
Beckworth: Just to step back, the natural interest rate, at least the short run version, can be thought of as a market clearing interest rate. Is that fair?
Kimball: As I say, it's exactly the interest rate it would take to get a lot of businesses to invest.
Beckworth: Right, across the entire economy.
Kimball: Of course, once the economy recovers, then the short‑run interest rate moves up to be equal to the medium‑run natural interest rate, the interest rate it takes to get businesses to invest probably moves back up into the positive region. In that moment in the deep recession, you might need minus five percent to get businesses to invest.
Beckworth: The market clearing interest rate, and the natural interest rate went negative, maybe minus five percent during a crisis. The Fed ideally wants to track that with its own short term interest rate.
Beckworth: It wants to set its target rate equal to the natural rate. In normal times, they can do a decent job, but what you're describing is a case where the actual, natural rate goes negative, and then the Fed is unable to follow it down. At least it believed it is unable to follow it down. Why is it? What is the concern about the zero lower bound that prevented the Fed from being more aggressive?
Fed Policy at the Zero Lower Bound
Kimball: Zero lower bound is really a very limited thing. It's a very particular problem. It's the problem that, if you had had interest rates at minus four percent, then a lot of people have this intuition, "Why would I ever lend to someone at minus four percent?" If you had no alternatives, if that's the best interest rate you could get, you would do it.
People have so deeply built into their minds this idea that, "Of course, I can get zero by saving paper currency, by making a pile of paper currency," it's tough for them to imagine a situation where no matter what they do, they're facing a negative interest rate.
You have to somehow deal with the paper currency problem. It's not about disadvantaging paper currency, it's about getting paper currency out of the way. The only time, at least in the foreseeable future, the only time I would ever have a paper currency earning a negative interest rate is when there were also negative interest rates in the other forms of safe ways to save money.
It's really just equalizing paper currency vis‑a‑vis everything else.
Beckworth: Before we get into that with any more depth, I want to step back again. The issue is, if we go below zero percent, we get negative natural interest rate values, it's hard for the Fed to go down there because the alternative is, it can earn zero percent on physical cash. Is that correct?
Kimball: Exactly. The Fed could try to say that the effective interest rate was minus five percent, but then people would just ignore it and say, "I'm going to make a pile of cash."
Beckworth: You mentioned earlier in Europe, the central banks over there have been able to lower them a little below zero, but there's still, at some point, going to be an effective lower bound.
Kimball: An effective lower bound is just when people do massive paper currency storage. There's a dirty way to deal with it, and a clean way of dealing with it. The clean way of dealing with it, what I mostly dealt with on my blog. Actually one of the powers that a central bank has, that is missing from most money and banking textbooks, maybe all of them, is that a central bank has the power to set the relative price of all the forms of money under its jurisdiction.
We take a lot of that for granted. Why is a $20 bill worth two $10 bills? It's actually not because of the numbers written on it, it's because a bank can go to the cash window of the Fed or other central bank. They go to the Fed with a pile of $20 bills and they say, "Hey, for each of these $20 bills, please give me back two $10s," and the nice folks at the cash window will say, "Sure, here you go."
They'll do it the other way, too. "I made a mistake, let me give you these $10s, and for each pair of $10s, give me a $20," and the folks at the cash window will do that. That's why a $20 bill is equal to two $10s. Now, when I go around the central banks, I give the following example, so you don't take this for granted.
In the criminal underworld, a $100 bill is not worth the same as five $20s. You've got that scene in the mob movies, where they say, "Bring me a million dollars in $10s and $20s." Why is that? It's because $10s and $20s are easier to launder.
Yes, they use a lot of $100 bills, but when it gets to time to actually launder things, they actually would rather have $10s and $20s. In the criminal underworld, you don't have low cost access to the banking system, because you go to the bank, and you might get detected.
There's a different relative price between $10s and $20s, and $100 bills than prevails in the legal economy. That's just an example to say, I wouldn't change that price. Leave that the same. What you can change is the relative price of money in the bank. Let's call it electronic money.
That might make you think of Bitcoin, but this is not Bitcoin. Government sponsored money, even bank sponsored money is fine.
Beckworth: Right, your checking account.
Kimball: Yeah, credit cards, debit cards, your checking account.
Beckworth: Most of our transactions are done through electronic money.
Kimball: I mean electronic money in a sense that we do all of it every day. Credit cards, debit cards, checks, wire transfers. Any time you're working with the banking system, basically anything other than cash or maybe traveler's checks is electronic money.
The only real difference between electronic money and cash is that it's very easy to apply negative interest rates to numbers in a computer, which is in a bank, because the numbers just get smaller. Computers could do that very easily. You have to do a little more work to engineer a negative interest rate with cash, but here's how you do it.
You just have effectively an exchange rate between electronic dollars and paper dollars. You can have very subtle things. You can call the exchange rate all kinds of things. I've often called it a time‑varying paper currency deposit fee. It's like you're a bank, you go to the cash window in the Fed, and they say, "OK, if you give us a $100 bill, we'll credit your reserve account with $98. That's a two percent deposit fee."
Then you say, "Oh, I made a mistake, let me withdraw that $98," and they give you back the $100 bill. You can call it a fee, but it's a refundable fee, if you reverse the transaction. If you have that, that creates an exchange rate at the cash window of the Fed, using this power of central banks at their cash window to determine the relative price of different forms of money.
You can very, very gradually have that change. We're not talking about confiscating people's cash or anything. We're talking about a very, very sedate, maybe over the course of a year, cash would lose two percent of its value. As I emphasized before, that would be in a situation in which money sitting in the bank would also be losing some of its two percent value, because it's a negative interest rate situation.
You're just putting on cash on the same footing as the bank accounts that now, in Switzerland, are earning negative interest rates routinely these days.
Beckworth: If you're in Switzerland, holding cash earns a higher return right now than having your money in the bank?
Kimball: That's right, except for storage costs.
Beckworth: Except for storage costs. You're saying, "Let's make them equal. Let's do that." If we can do that, we can lower rates to where they need to be. Lower them to the natural interest rate level, which will allow for the market to heal, and things to recover. In the absence of that, we have this institutional constraint called physical money that prevents the Fed or the central bank from doing that.
Kimball: I think some people get alarmed by negative interest rates, because they're somehow imagining minus 50 percent, minus 90 percent negative interest rates that sound like folks are coming along and confiscating all of the wealth.
It's minus four percent for a year, probably would've gotten us a very robust. If you'd had minus four percent in 2009, we would've had a robust recovery by mid‑2010. It's pretty easy to calculate. Suppose you had minus four percent in 2009, zero in 2010, and then two percent thereafter.
I'm thinking of two percent as being the medium‑run natural rate once the economy is doing OK. Guess what? Relative to two percent throughout, you would've lost six percent. What's actually happened? You have zero for seven years. In 2009, 2010, 2011, 2012, 2013, 2014, 2015, and so you lost 14 percent, because you had had seven years worth of two percent below that natural interest rate of two percent.
Which is better for the savers? They would've been much better off with minus four percent in 2009 and zero in 2010, than zero for seven years, because they would've only lost six percent relative to the two percent medium‑run natural rate, instead of 14 percent. Even for savers, negative interest rates are better. It may sound strange, but it's actually true.
Beckworth: That is the compelling argument. You look at the total return of the two scenarios, it makes a lot more sense to have gone with the negative four percent in 2009. However, that's a tough argument to sell. What's even tougher is to get many people to see that.
When we step back and look at all the criticisms the Fed has received, just for keeping rates low, rather than going negative.
Kimball: I've seen that.
Beckworth: It's hard. My question is how do you communicate this to folks out there who have a hard time understanding?
Kimball: On one level, that's easy. Twitter, Tumblr, you know? You have to keep saying this over and over again. Let me address this political cost. Of course, there's a political cost upfront for central banks to go to negative interest rates, but let's look at things now.
Let's look at the rest of the governments. All around the world, because of the great recession, governments have tumbled over and over again. People keep saying, "Let's throw the bums out because they're mismanaging the economy." Guess what? They have been mismanaging the economy, because they didn't go to the negative four percent in 2009.
In the Eurozone, and folks in Japan are not going to significant negative rates now, like they absolutely should. They are mismanaging their economies, and it makes sense for the public. It makes sense for the public to be saying, "Throw the folks out."
Beckworth: Do you really think, if the ECB, for example, went to minus four, they would change their views about how the government is running the economy? My sense is you would have to be even more concerned.
Kimball: No, that's the patience. Just think of what the beginnings of the presidential election we're going through now would look like if we'd had a robust recovery in 2010. Of course, people would've made a fuss about the negative interest rates back in 2009, but then the economy recovers, it works.
The politics are totally different. As soon as you're willing to look four years out or something, if you're fortunate enough to be near the beginning of your presidential term, as in fact Obama was in 2009. Whatever the Fed wanted to do, Obama should've been wishing greatly that the Fed would go to minus four percent in 2009, if he'd understood the politics.
Politics would've been a whole and nicer for him if the economy had been doing great in 2012.
Beckworth: You've gone around the central banks. You've made this pitch, and you don't need to disclose any names, but how did they receive it? How did they take your idea?
Kimball: First of all, the staff at all the central banks love it. Folks on monetary policy committees all have political antenna, and so they worry. Many of them have actually been quite favorable, too.
I believe that actually having heard about how to go to deep negative interest rates, as they have, and from me as I've going around to the central banks has given some central banks extra courage to go to the mild negative interest rates that they actually have gone to.
They know it's not the end. It's a little scarier going to mild negative interest rates if you think you're going to absolutely hit some effective lower bound that there's no way to breach. It's a lot easier to say, "OK, we can go to mild negative interest rates, and then if we have to, we can do what Miles was talking about and go deeper."
Beckworth: I wonder if the Fed had spent its political capital on negative interest rates instead of QE early on, we might've had more success down that path?
Kimball: Absolutely. Unfortunately, the intellectual foundation was not laid back then. Honestly, if the intellectual foundation has now been laid for negative interest rates. By the way, it's not just me. I mean, Ken Rogoff is actually going full tilt after this issue as well, for example, among folks who are very famous in other ways.
Beckworth: He's not doing it the way you're doing it, is he?
Kimball: Actually, no. You're a little behind the times. Ken Rogoff, I hear, is working on a book, and he have also now read my paper. The thing about Ken Rogoff is he doesn't respect blogs, and so he will not read a blog post.
Beckworth: Really? Wow.
Kimball: If it's an academic paper, then he will read it. There was an academic paper on negative interest rates just this past fall. Now, Ken Rogoff will read it, but he will ignore all blog posts.
Beckworth: The earlier proposals I'm thinking about last year, he wanted to abolish currency altogether. You, I think have a more pragmatic approach.
Kimball: Ken Rogoff and I were the two keynote speakers at the Bank of England last year, right after the conference that the Swiss National Bank happened the day before in London. Ken Rogoff spoke first, and mentioned me. He said, this actually makes me feel good. "I don't think me and Miles disagree that much, he's just more evangelical about it."
Quite independently, I got that from my discussion at the AA meeting, so that makes me feel good, to be called evangelical about negative interest rates.
Beckworth: Doesn't he want to abolish cash?
Kimball: Let me explain. Then what I said is, "Ken Rogoff wants to get rid of cash, but he's saying that's going to take 30 years. I'm talking about something that can be done tomorrow."
This very subtle shift in exchange rate between paper currency and bank money, that's something that you don't need new machinery. You've already got the cash window. You can send an instruction down to the cash window. You're done as far as the procedural part of it.
It doesn't take new pieces of paper, existing pieces of paper. In the US, green pieces of paper work just fine. You can do it tomorrow. If you want to view it as a transitional system towards eliminating cash, fine, but it doesn't need to be. You could keep cash forever.
There's a place for what Ken Rogoff is talking about, but anyway, Ken Rogoff, I had some correspondence with him over email.
He was very excited when he read my papers. Hey, he won't read blog posts, but he read it when it was an academic paper, an IMF working paper. I have a published paper in the National Institute Economic Review called "Negative Interest Rate Policy."
Beckworth: We'll mention both of those on the blog.
Kimball: You can find it on my blog. If you want my blog, go to the side bar that says, "Breaking through the zero lower bound with electronic money," and click on that, and you'll see it all. I'm easy to Google now, so I even have a Wikipedia page.
Beckworth: You have arrived.
Kimball: Yeah… No, I had that correspondence with Ken Rogoff. He was quite excited that you can use the existing pieces of paper. That's what he views as my contribution.
Willem Buiter figured out most of the stuff, but what Ken Rogoff views as my contribution relative to Willem Buiter is that I show you can do it with the existing green pieces of paper. You don't need new pieces of paper. They don't need to say something new, and it works fine.
Anyway, I hear Ken Rogoff is writing a book, and he's incorporating all of the things he learned from reading my two papers. We've much more converged than you'd see a year ago.
Beckworth: That's good to know. While we're on the topic of Ken, let me ask you this question. He's been eager, as you've mentioned, that the Fed be able to go to negative interest rates. On the other hand, he's written a lot about the debt super cycle.
One of the reasons we continue to be in the slump, here and around the world, this is debt overhang, kind of a balance sheet recession view. Isn't that intention with the negative interest rate views, if you could go to negative interest rates and get the recovery, what does that then mean about his debt overhang story?
Kimball: That's a good question. As you know, on my blog, it's not like I'm a one trick pony. I talk a lot about negative interest rates, but I do talk about other things as well. It's not negative interest rates alone that I recommend. It's the combination of a negative interest rate policy, when appropriate, and much higher equity requirements for banks and financial firms, and ideally, for individual mortgage contracts.
What do I mean by that? It's sometimes called, very confusingly, capital requirements, but that leads people off in the wrong direction. What it is is where do you get your money from? You get money in the form of debt where people are expecting it back exactly as they gave it to you, with some interest rates.
You get your money from stockholders who have signed up to take the hit if something goes wrong. If you require banks to have 30 percent, 50 percent of the funds that they raise from stockholders, you have people signed up to take the hit. It's not going to come back on the taxpayers, and on the government.
It's also not going to burn the system down, because if a bank gets in trouble, the stockholders of that particular bank lose a lot of money, end of story. It stops there. If you have a lot of equity funding of banks, then things don't propagate. You don't have any systemic problems.
Here, I'm very much in the same, very much sympathetic with Anat Admati and Martin Hellwig, who have written a very nice book, "The Bankers New Clothes." They advocate those very high equity requirements, and point out that, obviously, the bankers aren't happy with these requirements, because it means they get no bailout subsidy anymore.
They can no longer say, "Heads we win, tails the taxpayers lose." Their stockholders are taking on the risk. Disregard the horror stories that the bankers tell about how horrible these high equity requirements are. They're just not costly to society in general, because banks back in the 19th century raise their money, in important measure, through equity, back when there weren't all these government guarantees.
Now, I'm not saying we should go back to the system back then, because there's a virtue to these government guarantees, but we should make it so we never have to actually use these government guarantees. The stockholders have signed up to take the hit. This is a very, very practical thing.
One of the things is, this is highly complementary with negative interest rate policy. One of the reasons that you don't have the big wigs advocating even higher equity prime rates, the big wigs among economists, is because some of them, like let's say Larry Summers...He was quite explicit. He's worried that if we have higher equity requirements on banks, that it'll reduce aggregate demand.
Guess what? When you have negative interest rates, when you can go as deep as you need to with negative interest rates, aggregate demand is no longer scarce. You no longer need to do this, and that, and the other thing. You no longer need to tolerate bubbles in order to get extra aggregate demand or whatever other harebrained scheme someone has. You use totally standard monetary policy. I'm serious about negative interest rate policy being conventional monetary policy. Unlike QE, it's not going to inflate asset prices as much because negative interest rates operate on a short rate rather than bringing in the long rate.
Obviously, the short rates and the long rates are linked. QE tilts towards affecting the long‑term interest rate more which inflates asset prices more than it helps the economy. Whereas if you do negative interest rates with a negative short rate, you're going to help the economy more than you inflate asset prices, and to extent you do make asset prices go up. All the risks are on the shoulders of the bank stockholders as they should be when you have these high equity requirements.
Beckworth: I understand that point. We need more capital, less borrowing, but stepping back and looking at the crisis as it unfolds in 2008, I guess my question is, many people see this crisis as inevitable. They say, look, there was this build‑up of household debt, household balance sheets were over‑levered. And then, when housing prices came down, boom, we had to undergo this massive deleveraging and massive cut in aggregate demand. But what you're suggesting is, look, if we have had negative interest rates, we could have avoided that. So, I guess I'm seeing...
Kimball: No. Take your words. First of all the negative interest rates would have gotten as quickly out of the effects of the financial crisis. Those things wouldn't be as bad. You still would have had the financial crisis, but the after effects of it might have lasted a year rather than seven years.
But remember you said a keyword "levered." People want to borrow up and they get levered in the good times. Well, guess what, a total equivalent it's just another word for the same thing saying is leveraged limits are the same thing as high equity requirements. An equity requirement of 50 percent is saying you can't have a leverage more than 2.
If you have a simple rule that you can't have a leverage beyond a certain level namely two or three with in by the way, in 2008, they were actually leveraged by a factor of about 30. There's a huge difference between 2 or 3 and 30. If the banks had been leveraged up by a factor of 2 or 3 rather than a factor of 30, we wouldn't have had the crisis.
Yes, there's a cycle where things look good, and then people lever up, but only because we didn't have leverage requirements.
Beckworth: Well, I'm talking about households here though.
Kimball: We understand this now.
Beckworth: You've seen the balance sheet view of the recession where the proponents say, "Look, it was inevitable. These post financial crises recoveries were always slow, because we have all these households..."
Kimball: That's just not true.
Beckworth: OK, well, that's what I wanted to hear from you.
Kimball: I mean, it can be true historically, but it's...There's a way to say it.
Beckworth: You're saying that had the Fed ‑4 percent, the recovery would have been faster even with the accumulation of debts...
Kimball: Absolutely. Yeah, sure. Your risk premia would go up, and so you're going to have to go to very deep negative rates. You've got to have you interest rates go down at least as much as the risk premia go up, and more because the economy is in recession.
Even if the economy weren't in a recession, you'd want to have your interest rates go down almost as much as the risk premia went up. Then if you don't catch it instantly, and you wind up in a recession, you're going to have to go down further.
Guess what, risk premia aren't infinite. You can't have interest rates go down as much as the risk premia go up, and if you make your interest rates go down as much as the risk premia go up, and then you make them go down enough more to deal with the fact that business conditions are worse, you'll get investment, you'll get recovery.
By the way, the zero lower bound isn't the only problem with monetary policy. In general, there's another bad aspect of monetary policy tradition which is interest rates moving because, basically, central banks just don't move interest rates enough.
We could have recessions, and the business cycles over quicker if central banks simply moved interest rates twice as much for a shorter amount of time. They should act much more vigorously, and once you get rid of the zero lower bound, that's possible on the downside, and it's always been possible on the upside.
Remember, and honestly, this is even what by law, central banks are supposed to do. Many central banks are supposed to focus on inflation. The Fed is supposed to focus on inflation, and things like unemployment and output.
Nowhere does it say in the law that they should be trying to keep interest rates at the same level, or nearly the same level all the time. You should move interest rates as much as it takes to cure the economy quickly.
Beckworth: OK, well, on that note, we are out of time. Our guest has been Miles Kimball. Thank you, Miles, for being on our program today.
Kimball: Thank you.