Update: I am delighted that Gerald Seib and David Wessel flagged this column in their August 2, 2013 Wall Street Journal “What We’re Reading” feature. They write
University of Michigan economist Miles Kimball says the best candidate to take over as leader of the Fed will back negative short-term interest rates, nominal GDP targeting, and high equity requirements for banks and financial firms. If a candidate is chosen who opposes any of these three, Mr. Kimball predicts another serious financial crisis in the next two decades. [Emphasis added.]
In their last sentence, they go beyond what I intend when I write
But any candidate for the Fed who gives negative answers to these three questions will be indicating a monetary policy and financial stability philosophy that would leave the economy in continued danger of slow growth (with little room for error) and high unemployment in the short run, and the virtual certainty of another serious financial crisis a decade or two down the road.
Let me clarify. First, it is not these beliefs by the Fed Chief alone that would lead to a financial crisis, but the philosophy that would answer my three questions in the negative, held more generally–by the Fed Chief and other important players around the world. But of course, the Fed Chief is a hugely important player on the world stage. Second, I write “who gives negative answers to these three questions” meaning negative answers to all three. To separate out the causality more carefully, what I have in mind with the parallel structure of my final sentence in the column (quoted just above) is
- Rejection of both negative interest rates and nominal GDP targeting–and perhaps rejection of negative interest rates alone–“would leave the economy in continued danger of slow growth (with little room for error) and high unemployment in the short run."
- Rejection of high equity requirements for banks and other financial firms would lead to "the virtual certainty of another serious financial crisis a decade or two down the road."
Outtakes: Here are two passages that I had to cut to tighten things up, but that you may find of some interest:
In brief, the Fed put itself in the position of getting bad results using unpopular methods. By July 2009, the Fed’s job approval rating in a Gallup poll was down to 30%, below the job approval rating for the IRS . By the time of the 2012 presidential election campaign, Republican crowds enthusiastically chanted the title of Republican candidate Ron Paul’s book End the Fed.
…in a 32-second exchange with Charlie Rose that is well worth watching for the nuances, President Obama said “He’s already stayed a lot longer than he wanted, or he was supposed to.” The praise for Bernanke in the Charlie Rose interview is so tepid and ungenerous that my interpretation is the same as US News and World Report editor-in-chief Mortimer Zuckerman’s in his July 25, 2013 Wall Street Journal op-ed “Mistreating Ben Bernanke, the Man Who Saved the Economy”: “This comment made it clear that Mr. Bernanke’s days were numbered.”