Hendrik Sybrandy Interview of Miles Kimball about the Fed and the Pandemic, August 23, 2021
Hendrik Sybrandy interviewed me on August 23, 2021, a few days before the beginning of this year’s “Jackson Hole” monetary policy conference, which actually took place remotely this year. At the top of this post is what actually aired on CGTN. Hendrik was also good enough to send me the second video (just above) which gives my answers in full, but unfortunately doesn’t include Hendrik’s questions. I think you can understand what I am saying anyway, though, especially if you listen to the shorter clip up at the top first.
With the second video (just above) that gives my answers but not the questions, I decided to experiment with getting a transcription from the freemium transcription website otter.ai I had to use Quicktime to export to an audio-only file first, but then otter.ai made the transcript below. So you could see exactly what quality I got from otter.ai, I didn’t edit what is below at all.
Oh, no, I know. Yeah, yeah. Oh, okay. on top. Okay. That's a great question. I'm not? I'm not sure I know I been once and I, one of the purposes is for central bankers around the world to have a chance to get to know one another. So this is this is the gathering where central bankers from all around the world are in a large number are in one place?
Well, it, it depends a little bit on which aspect of things. But in terms of monetary policy, I think it's most mostly a myth that you need monetary policy coordination across countries, each country can keep aggregate demand at the level that it wants to all by itself, if it if it uses the full range of policy tools. Of course, I'm a big advocate of negative interest rate policy. And things get more complicated if you kind of irrationally avoid negative interest rate policy. But basically, each country can each central bank can get aggregate demand at the right level, there's a little more reason for coordination on financial stability rules there. If If banks fail in one country, they can cause banks to fail in another country. But what's most important, though, is the exchange of ideas. So you have, you know, you have innovations in central banking, like, like negative interest rate policy that's been innovation in, in Europe and Japan, and it's in there other innovations in monetary policy that Fed is, is inching in the direction of price level targeting, as opposed to two inflation targeting, which is, in some ways is a fairly technical thing, but can matter, potentially can matter a lot. So, so it's, it's the exchange of ideas, if you have a new idea of how to do central banking, better, it's good for them to be rubbing shoulders so that all the good ideas get passed around. Yeah, exactly. I realized that that's not literally true this year.
I don't know what they'll talk about this week, there's, I mean, inflation, there's a real question of how permanent and the effects of inflation are going to be there. The pandemic has messed up a lot of things. And so there's everything, all of the economics is different with the, with the pandemic. And so when when we get that under control, then inflation could be very, very different than it is. And, you know, at this moment, in the pandemic, one of the things that, I think, is, ironically, economists really realized that I think other governments didn't pay enough attention to was that controlling the pandemic, it was the key thing for all the economic issues and we we should have been throwing a lot more money that we should have taken a small fraction of the money we took to bail people out. It's can be appropriate to bail people out during the pandemic, but we should have taken a small fraction of that money to just fight the virus directly. And we would have been way ahead. So I think Economists were very aware of just how many trillions of dollars, it's, it's worth, you know, every every month that the pandemic goes on longer, it has a huge dollar cost to the economy. And so throwing enormous amounts of money at pandemic control is a good idea. We, we didn't throw enough money at trying to tamp down the pandemic.
Well, by mine, a lot of my knowledge is just from reading, reading the newspaper, but they're, they're far from the newspaper. There's some very good reporters who dig into this. And if they're not talking about raising the interest rates for quite some time, maybe not till, maybe not even until 2023. But they're probably going to slow down later this year, they're probably going to slow down their purchases of long term, long term bonds and long term mortgage bonds. So that they'll they'll go very slowly. And by the way, that that's partly it, things are complicated, because of the extra supply problems that you have with with COVID. that's causing inflation to be so high at the moment. But the Fed believes that the underlying inflation rate, once we get out of the pandemic, is is not so high, but nobody knows how high that'll be until we get out of the pandemic. So, if we get out of the pandemic, the Fed, the Fed has said it wants to be slow to raise interest rates, until they see inflation running like two and a half percent or something like that. So. So it used to be that that's partly what price level targeting means that it's if inflation is running below 2%, for a while, then they want it to run above 2% for a while. And so inflation, certainly, you know, like a year or two ago, was running below 2%. And so they're still happy to have it run above and the way they think about this, they, they always tend to abstract from what they think of as temporary movements in inflation. So, you know, folks who are not in central banks, look at whatever inflation is at the moment, but the Fed is trying to look at the underlying inertia of inflation, if you will, you know, if you think about, if you think of spinning and uncooked egg, and then you and then you stop it, and then it keeps going, that that the sloshing around of the liquid in the egg in the middle, that's the inertia of inflation. This is this is a little bit the opposite where the egg is spinning especially fast. But but the Fed is thinking it's on the outside of the egg that spinning fast. The inside is spinning a little slower.
Yeah. Absolutely. Yeah. And so they are judging a lot by the low levels of inflation that were there before the pandemic. So they nobody, nobody knows whether the inflation caused by the pandemic is going to be keep on after the pandemic. I mean, we just don't have I mean, this is this is very unusual situation. And so I think the Fed is looking at, well, inflation was pretty low before the pandemic, but besides, they're much worried more worried about low inflation and high inflation these days. And that has to do with their resistance to negative interest rate policy. So the Fed, unlike some other central banks, has been very, very, they they've said very, very, you know, they've been very loath to go to negative interest rate policy, which is unfortunate because what negative interest rate policy allows you to do is to have lower inflation. I mean, the main, the main reason the Fed wants inflation is because they want to have inflation instead of negative interest rates. If If, I mean, some people hate negative interest rates directly, but if you hate them inflation, if you mostly Hate inflation, then you're better off with the willingness to do negative interest rates. Because if you are willing to use negative interest rates, you can have zero inflation and still stay, you know, stimulate the economy when there's a recession. But because what, you know, there's a concept economists have of the real interest rate, basically, it's the interest rate minus inflation that matters. And so it's like an interest rate looks lower, you have to look at interest rates in comparison with inflation. And so interest rates really act like lower interest rates when there's a higher rate of inflation. So, so that's so the Fed is forcing inflation on us because they're afraid to use negative interest rates.
Oh, boy, I mean. Well, I think you I think we just pointed that that I mean, whatever the official program is, how do we read things? When with this EAD pandemic, affecting everything so much?
Oh, yeah, absolutely. Well, actually, that's where I, that's where I think actually economists should be brought into fighting the pandemic more, because it's not just it's not, it's not that what's required is more to see how large systems work, which is something that that economists are trained at so many economists have actually written papers using epidemiological models. And, you know, economists have been at the forefront of saying, Oh, we should have gotten in fast, cheap tests earlier on, we now know, the emphasis has shifted towards vaccination, appropriately, but early on, if we had fast, cheap tests and use them very broadly, it could have it could have helped a lot. So I actually think that economists should have been brought into directly fighting the pandemic more. I mean, they, they economics helps you understand the urgency, it's not just a matter of controlling the pandemic, it's like getting it to end one month, sooner or safety, you know, is is crucial. And that Need for Speed is something that I think, was obvious to economists and in some of the public government policies, we're less focused on speed and controlling the pandemic.
Oh, well, we're in the thick of things. I mean, this it, this delta variant is is causing a lot of economic disruptions. And I think we're still at the stage where it will probably get worse before it gets better. I mean, this delta variant has, I think, I read that it has a reproduction ratio of six. So it spreads about, it spreads incredibly fast. And I think, again, I I think the big issue really is the pandemic itself, and they're useful insights. They're basically it's we're at the stage where, here's, here's one of the bits of perspective. I mean, the point of slowing down the pandemic, was to give everybody a chance to be vaccinated. Once everybody has a chance to be vaccinated, and some people, of course, will refuse, then there's not a big reason to slow down the pandemic anymore. And except for overwhelming hospitals, they're kind of those two issues. You want to get people to get a chance to be vaccinated before the before they're exposed. And, boy, you better get vaccinated soon, or you're you because it's really hard to not get exposed to this delta barrier because it's moving so fast. So it's very urgent for people to get vaccinated if they want to protect themselves. There's the issue of giving kids a chance to get vaccinated, and there's the issue of overwhelming the hospital system. But at some point, people have had a chance to get vaccinated. And other than slowing things down a little to not overwhelm the hospital system, you got to figure this delta variant this so, so spread so easily that everybody's going to be exposed. It's just whether you're going to be protected by vaccination before you're exposed or not. And so the crushing the economy by by trying to do social distancing, I think, at some point is, is a fool's errand because this delta variant is so aggressive, everybody's going to be exposed unless they take really, really extreme measures to isolate themselves. And that, but the point was mainly to get people a chance to be vaccinated first. And it were within a couple of months of saying, people have had their chance. Now, we should. Now Now, we can't afford this shutdown the father me anymore. I mean, we get to get the kids vaccinated if their parents are willing. And let's not hurt the economy too much more beyond that. But so notice, I, again, I think that it's the pandemic policy, and not that, you know, the mitigating economic policy, that's the key issue.
Oh, I think the Fed is, I think the Fed is doing an okay job on its on its immediate decisions. What I really liked them to do is I think the key issue on the Fed is really the appointments to the Fed, who is going to be appointed to the Fed. I wrote a blog post about that. I think that it, I think that it matters, I think that the I, who is if I don't know if this will happen again. But in the past, the vice chair has led these committee meetings to determine the what they call the framework for monetary policy. And that framework, the last time was was very anti negative interest rates, which I think is a problem in emergencies we might face in the future. And so it matters who the new to the new vice chair is whether they're kind of irrationally against negative interest rates or whether they allow us to kind of start moving towards the negative interest rate policy that will allow us to bring down inflation. Several I don't, I don't remember exactly. But they're, they're, you know, they need to appoint a chair. I want one. So what I one thing I said in my blog post is, even though other people would also be good shares, I favor reappointing Jerome Powell, simply to try to depoliticize the fed a little bit more. I mean, I think that if if you have presidents of different parties, you know, nominating the same Fed chair that, that ends up sending a good message that we want to depoliticize the Fed. And so I think, as I say, I think there are many other people who could be good Fed chair. So it's not it's not a disaster to appoint some of the other candidates that people are talking about. It's just that if every time there's a new president, you have a new Fed Chair, I think that politicizes the Fed somewhat more than if you if you have some fed chairs reappointed by presidents of the other party, and everybody thinks Jerome Powell has done a good job on that monetary policy, pretty much I'm sure there. Everybody's way too strong. But there's a pretty good consensus that he's done a good job on that. I think there's a reasonable argument that he could have been tougher on on in having high equity requirements for banks. These are sometimes called capital requirements. But the issue is, if banks are if banks have a decent fraction of financing from stockholders, then the stockholders or people who signed up if the bank gets in trouble, they then accept a lower stock value. If If not, you end up if you don't have enough stock financing of banks, then you wind up with bailouts. And so we should all be quite concerned to have high equity requirements for banks. I think Jerome Powell could have done better on that. But on the other hand, I think that If I think he might well get the message that he should be tougher on that in the future if he's, if he's reappointed. So I think it's great to talk about that. But I think I've talked about that and kind of give Jerome Powell the message, he ought to be tougher in terms of saying bank should be financed a little more by stock holders and a little less by borrowing, then then what he's done in the past. And but I think you'll probably be responsive to that.
Well, I, you know, there, I've got to say, if they did try to convey a message to the Fed, it would be mostly grandstanding, because as far as monetary policy goes, each country can do its own monetary button can do its own aggregate demand management, regardless of what the other central banks are doing. There. There are some countries that are think, in a troubling way trying to keep fixed exchange rates. And I think there there should probably be less of that. And anyway, countries complain about the Fed said other central banks complain about the Fed to hide their own problems and their own failings. That's my view on that.
No, I think I think that's pretty good. There are I these are all important issues. And I hope well, I mean, I guess there's one other issue that's come up, which is a central bank, digital currencies, I think that's a good evolution, it has to be done. Right. And it and one of the things that actually, let me let me highlight a technical issue, which is, I think it's a very good thing that the Fed is regularizing and, and institutionalizing a little bit more. Its use of the its use of the repo markets. Because I think in the evolution of monetary policy, this will be important in the future. So one of the things in terms of so in the middle of writing a paper about us negative interest rate law, which is very interesting. And the the feds repo facilities are actually very important in the legality in insurance, ensuring that negative interest rates are legal under current law, you don't need new law to be passed to make negative interest rates legal because the the the you don't, that you don't need negative interest rates and reserves, you can have the reserve accounts, if the reserve accounts or caps then you have these repo facilities take on some of the functions that have previously been taken on by by the reserves. And these repo facilities clearly are allowed in law to have whatever interest rate you want. The reserves may not be able to have a negative interest rate, but you don't need negative interest rates on reserves if you kept them and use the Reapers facilities. There's there's a lot of flexibility there. And so I think people should keep their eye on these repo facilities. They're going in both directions. Now, both repo and reverse repo where the Fed is letting people lend to the Fed and the Fed is lending to other people. You're having both now. That's it. That's it very, very important development. Keep your eye on those. I think they'll grow in importance over time.
Well, I, I, I think that there are many things that are a distraction for the Fed. I mean, I don't think I think it's a distraction. Maybe this is an unpopular thing to say, but I think the Fed has so many jobs already with monetary policy and financial stability. regulation. I think it'd be better to let them focus on that job and not insist that They they be. I mean, I think we should work a lot on social justice. But I don't think the Fed is the appropriate spearhead for trying to work on social justice, I don't think the Fed is the appropriate, I mean, we should have carbon taxes to deal with global warming. I mean, that's not, that's not a Fed thing. That's it, that's a treasury thing. And that's a matter of getting the political consensus together. And we should be doing research on, you know, put more money into research on solar power, and, and so on. I think this idea that every institution in society has to be involved in those particular fights is a mistake, the Fed, if the Fed does its job on, it messes up all of this stuff, if the Fed puts us into a big recession, because it's unwilling to use negative interest rates, that's really bad for social justice, the Fed should be concentrating on getting its act together on negative interest rate policy, rather than which will help his social justice way more than doing you know, direct stuff on that. And it'll even help in terms of you know, probably even help in terms of climate policy because if we had a giant recession because the Fed wouldn't do negative interest rate policy that would distract the government from making progress on climate policy. So I just think the Fed can contribute way more to climate policy and to social justice by doing it's for mission that it can by directly working on those things. Oh, yeah, so just if you look at them and by the way, I'm on Twitter at at Miles Kimball and also my blog is Confessions of a supply side liberal and you can you can find it there blog dot supply side liberal calm Okay. Great, thank you, you. Right. Oh, yeah. And do do send me do send me all the links and stuff. I'd like to post these these links to this on my blog. Great. See you later.