In an interview with Bloomberg last night, Mitt Romney reiterated that he wouldn't reappoint Ben Bernanke as Fed chairman, and strongly hinted that he would choose one of his two top economic aides, Harvard's Greg Mankiw or Columbia's Glenn Hubbard, instead. Fox Business reports that Hubbard is the front-runner for the post, but notes that Stanford's John Taylor, a Romney adviser and senior treasury official under Bush, is also in the running. All three are economists with long paper trails indicating their views on monetary policy. So what can we expect them to do if Romney taps them for the post?
It's funny that Romney is touting Hubbard as a possible contender to replace Bernanke, given that the Columbia business school dean just the other day said Bernanke should be strongly considered for reappointment, calling him a "model technocrat" who Hubbard has known since they were "practically kids." But this is also not the first time Hubbard's been considered for the job. He was widely speculated to be runner-up for the position in 2005, when George W. Bush, for whom Hubbard served as chair of the Council of Economic Advisors from 2001-03, first appointed Bernanke. So much so, in fact, that students at Columbia made a parody of "Every Breath You Take" mocking Hubbard's Fed ambitions:
So what does Hubbard think about monetary policy? On the one hand, he, like many Republicans, has been cool toward Bernanke's efforts to drive down interest rates by purchasing bonds — the so-called "quantitative easing." In October 2010, as the Federal Reserve was preparing to announce the second round of easing, Hubbard expressed skepticism about the move.
But Hubbard may disagree more with the mechanism Bernanke used than with his efforts to boost the economy. Most notably, Hubbard and his Columbia colleague Chris Mayer have proposed (pdf) a massive refinancing of mortgages under the purview of the Federal Housing Administration, Fannie Mae or Freddie Mac. They estimate that the plan could save 30 million homeowners an average of $2,000-3,000.
Hubbard wanted to implement this policy through federal regulatory agencies, but as Joseph Gagnon, a fellow at the Peterson Institute who managed the first round of quantitative easing at the Fed, tells me, the policy is easily implementable through Fed policy as well. The Fed, for instance, could buy up underwater mortgages and refinance them under lower rates. Sen. Jeff Merkley (D-Ore.) has proposed a refinancing plan similar to Hubbard's that is designed to be implementable by the Fed in this way. Even if Hubbard didn't do refinancing himself as Fed chair, he could still help out, Gagnon says. "I would hope that he would …be amenable to holding mortgage rates down low as they fix the mortgage market," he explains.
Hubbard has also written, in an op-ed promoting Romney's economic platform, that he wants to expand the economy through austerity policies that push down interest rates, and thus the value of the dollar, to promote exports. It's doubtful this could work, given that interest rates on U.S. debt are already negative, but there's little doubt that the Fed could push down the value of the dollar if it wanted to by buying up lots of foreign currency. Hubbard didn't make that connection specifically, but his interest in devaluation when it comes to fiscal policy could carry over if he became Fed chief.
Mankiw, who succeeded Hubbard as CEA chair (and was succeeded in turn by Bernanke), is perhaps the most dovish of the shortlist. In an op-ed last year, he sympathized with Fed critics calling for the bank to allow its inflation target to double from 2 to 4 percent to spur growth, but argued that that policy was politically untenable. Instead, he proposed keeping the 2 percent target but making it a "level" target, meaning that if one goes under 2 percent inflation one year, the Fed will promote inflation of over 2 percent the next year. That would imply a considerably looser Fed policy regime than the one currently in place, one that could be achieved either through additional asset buys (that is, quantitative easing) or other, less traditional policies.
And Mankiw has expressed an interest in those less-traditional policies as well. In another piece, he cheekily suggested implementing a 10 percent negative interest rate on cash by invalidating all paper currency whose serial numbers have a certain final digit. The effect would be that 10 percent of all money would be wiped out, spurring people to spend it or keep it in banks that offer higher, but still negative, returns. In a follow-up post, he argued that a negative interest rate of about 1 percent is appropriate.
In the past, he has questioned the value of regular inflation as a Fed target altogether, instead suggesting (pdf) a target of wage growth. That policy has some important similarities with nominal GDP (NGDP) targeting, a policy endorsed by some Fed critics, such as former Obama adviser Christina Romer and Bentley University's Scott Sumner, which would have the Fed allow more inflation whenever growth is suffering. Wage targeting would have a similar effect, one that some experts believe would handle recessions more effectively than NGDP targeting.
Mankiw has gotten more cautious about expressing these views lately, but Gagnon doesn't think that expresses an underlying change in opinion. " I’m not sure I’d call it hawkish so much as I’d call it circumspect or cautious," he explains. "He's really clammed up a bit."
John Taylor, a Stanford professor and former undersecretary of the Treasury for George W. Bush, is most famous for the Taylor rule, which says that the Fed should set interest rates based on a simple, consistent rule based on the rate of economic growth in the economy and the level of inflation. Taylor's version of the rule recommends low but not negative rates, Gagnon explains, but others, like Mankiw's version, use unemployment and suggested highly negative rates throughout the crisis.
Taylor, for his part, has come out consistently against monetary stimulus, arguing that quantitative easing undermined the goal of stable, reliable Fed policy. The Fed, he concluded, "held rates too low for too long" after the crisis. He has also endorsed eliminating the Fed's full employment mandate, arguing that it would be easier to make rule-based policy if the bank focused simply on limiting inflation.
In summary, Hubbard and Mankiw "could well be closet doves," Gagnon concludes, with Mankiw not even particularly closeted. Taylor, on the other hand, would almost certainly avoid additional easing.