Professor Perry Mehrling teaches the popular Barnard College course Money and Banking, which has over 120 students registered this fall. His research focuses on the foundations of monetary economics and the history and applications of monetary economics and finance. Professor Mehrling is currently a member of the Board of Directors of the Eastern Economics Association, and a member of the Economists Forum at the Financial Times.
Julie Tauber sat down with Professor Mehrling (not virtually! In person! In his office!) and asked him about the American economy, forward guidance for the European Central Bank and his upcoming book about economist Charles P. Kindleberger.
Julie Tauber: I’d like to pick your brain about the current state of the American economy. [Chairwoman of the Federal Reserve] Janet Yellen said a couple of weeks ago “the labor market has yet to recover fully.” Other economists believe the U.S. is in a better state than she lets on. What’s your take?
Perry Mehrling: Well, I think it’s definitely true that there are signs of recovery. My wife is a headhunter, so she’s a leading indicator.When her phone is ringing off the hook,that’s an indicator I look at. But I think the recovery in the U.S. is also uneven. It is in different industries and different sections of the country, and that’s the sort of thing that Yellen concerned about.
JT: On a similar note, do you think the Fed has waited too long to raise rates, or do you think raising rates in 2015 is appropriate timing?
PM: The interest rates,which I’m more concerned about,are not so much money market rates but capital market rates. I have advocated that in terms of the so-called “exit strategy,” that the Fed exit from its positions in duration risk and credit risk before it starts to move money market rates. That doesn’t seem to be what they are doing.
JT: The Wall Street Journal reported recently that much of the interest rate payments made by the Federal Reserve go to foreign banks holding reserves at the Fed. From your perspective, does this matter at all to us?
PM: No. Because, these foreign banks could be holding Treasury Bills instead.And they would be getting interest on Treasury Bills that’s paid by the government – I don’t see that there’s any economic difference between those two.
JT: Interesting. When gauging the state of our economy, economists often look at real GDP growth and unemployment. Yellen always cites many different economic indicators at press conferences. Which indicators do you think are most important to look at?
PM: Well, you’re asking about indicators mostly about the business cycle. But I would draw your attention to indicators that are more about welfare and how people are doing. Indicators like long-term unemployment, for example, or labor force participation – people dropping out of the workforce after they are unable to find jobs. I would draw attention to measures of income distribution and distribution of wealth. Economists do pay attention to these things, typically. They’re not the headline news – maybe they should be.
JT: Alan Greenspan told WSJ MarketWatch in July that he “was always doubtful during his tenure about how much the Fed could effectively communicate to the market, because they were always second guessing the Fed.” How important do you think Fed communication and forward guidance is?
PM: Well, I am not in favor of the forward guidance that we have had so far. It seems that telling the market exactly what you’re doing is giving the market information that allows it to game you and to make money at your expense. I understand the rationale behind it – it comes from particular models of economics in which future expectations cause behavior today. But in terms of how it’s actually playing out, this is about speculation – that is not in most of those models.
JT: On September 18th the European Central Bank started “two special lending operations ‘targeted’ long-term loans” and the buying of covered bonds and asset-backed securities. Do you think these programs will have a profound impact on the European economies – will they improve from this?
PM: Well, this is QE– quantitative easing – which Europe is trying to do. The ECB is interested in trying to get credit going again, and they see taking securitization markets going again as the key. European regulators have been preventing securitization from getting going by creating capital requirements for people that want to hold these securities.So the ECB is trying to step in and push the other way by saying – We’ll buy them! But if you’re fighting against your own regulations, you’re just going to put a lot of stuff on the balance sheet of the ECB. And the ECB will have the kind of exit problem that the Fed is facing right now.
JT: You gave a talk titled “The Emergent New International Monetary System” at the Asian Economic Community Forum in Korea a few weeks ago. Can you tell us, in layman’s terms, some of the key points addressed in your talk?
PM: This talk came out of some research I was doing at the internationalization of the renminbi, the Chinese currency which may get approval from the [International Monetary Fund] soon. The way I approached that the question was to ask, for China, is what is the international monetary system that you’re trying to internationalize into? What is this system that you’re trying to figure out how to engage? And here’s the main point: it’s a dollar system. But the Fed is not the central bank of the world. The central bank of the world is the consortium of the top six central banks: the Fed, the ECB,the Bank of Japan, the Bank of England, the Bank of Canada, and the Swiss National Bank. Just about a year ago, they extended the swap lines between these central banks that were created during the crisis. Now it is not just for crisis. It is permanent swap lines, of unlimited size, between the six largest central banks. The C6 as I call them are positioned at the top of the system.
Now the BRICS Bank (Brazil, Russia, India, China, and South Africa) that’s going to be in Shanghai is also something China is keen on. But you need to think –where are the individual countries going to fit this emerging structure? It is a framework that I’m urging for understanding.
JT: So when you say at the end of your presentation “Forget the G7 (or the G20), watch C6” – What exactly are you saying there?
PM: What I’m saying is that the G7 or the G20, typically these are meetings of finance ministers, treasury ministers and the fiscal authorities of the top seven or the top 20 countries. I’m saying that it’s the central banks that are important. But that also means that it’s monetary policy, it’s the central bankers – not the treasury officials, who are backstopping the global system at the moment. I think that is a sign of trouble. You want to have an economy where central bankers are not that important. They become important when the system is under tremendous stress – times of war, times of the financial crisis. I think there’s a lot of stress in the world system. So it’s good that the central banks are noticing and taking responsibility for this.But it is because of the challenges that we’re facing, and because other institutions aren’t working that well.
JT: You’re also in the middle of writing a biography of the economist Charles P. Kindleberger (1910-2003). What in particular drew you to this economist?
PM: Well, I wrote a book during the financial crisis – The New Lombard Street. It was a kind of history of the development of the Fed from 1913 in its birth through the various challenges of depression and war.And then it ended with the financial crisis. It was an attempt to create some institutional and historical framework for understanding the financial crisis. What’s missing in this book is, by focusing on the Fed, that this is a global financial crisis. I thoughtmy next book should be that same time span, but be a sort of a biography of the dollar, but the dollar doesn’t have any personality. Then I found Charlie Kindleberger. I thought – Here’s a guy that was born in 1910, and lived through the whole century! So I could hang this whole story on the life and times of Charlie Kindleberger – maybe.
Then I looked around and discovered that, in fact, this is a very interesting story. There’s an arc of a life there. It’s a biography about the international monetary system through the life of an international monetary economist. In that regard, it’s more like my book on Fischer Black, which is the story of modern finance. It is about the rise of modern international monetary theory.
So that’s the idea. He’s a – well you’ll see, you have to wait for the book!
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