Friday, July 26, 2013
The New Fed Chair
From my perspective the policies adopted by the current Fed have been less than effective. I am not a fan of creating fiat money and then paying the banks to hold that dough in their reserves, which is fundamentally what has happened over the last couple of years.
That being said the current Fed Chair Ben Bernanke will step down and a new chair will be chosen. In the last few days there seems to have developed a fight between supporters of Larry Summers and Janet Yellen.
Yellen is generally a greater supporter of using fed policy to reduce unemployment rather than holding inflation down (called by some a dove). But she is a first rate economist. She is married to George Akerloff, the former UC Berkeley professor who wrote among other influential papers the market for lemons - where he argued that the price of used cars is discounted from optimal levels because of the sleaze in the ranks of used car lots. Nancy Pelosi said it would be "nice" to have a woman. Yellen can stand on her scholarly record, her gender should be irrelevant.
Summers is one of those Washington cockroaches that seems to resurface in every administration of a democrat. He is arrogant, and quite willing to twist positions as winds change. In some ways he has been much better on at least talking about reducing the levels of deficits (although his role as Fed Chair would have a minimal role in that). Wonkblog described the potential choice of Summers in very clear terms -he "has a track record of being supremely confident in his own intellect, to the point of being dismissive of those with whom he clashes." Churchill once described Chamberlain as a very modest man with a great deal to be modest about. Unfortunately the former Harvard president does not fit the first half of the statement - any fed chair should fit the second half.
Summers, in a statement to Senator Murray's budget committee said in June of this year
"I am increasingly optimistic about our economic recovery. Indeed, I believe our economic prospects now look as sound as at any time in the last 15 years. The late 1990s saw the emergence of a major stock market bubble which was followed by recession in 2001 and slow recovery giving rise to fears of deflation. Soon enough bubbles recurred, this time credit and housing markets, leading me to observe in 2006 and 2007 that again, “The main thing we have to fear is lack of fear itself.” In August of 2007, the financial crisis began with profound distress overtaking the economy in late 2008. Recovery since that time has been real if inadequately paced.
I think it is now reasonable to expect the pace of recovery to accelerate if sound policies are pursued. " The statement mixes hubris with odd policy judgements - exactly what we do not need in the position.
About a third of the democratic caucus in the US Senate sent a letter to the President this week urging Yellen - which was a clear slap at Summers. Some commentators are arguing that the discussion going on between both sides will doom both candidacies.
I began to grow tired of the Greenspan years where he would go to Congress and spin words to the enthrallment of members of congress who wanted to look like they understood economics. Bernanke, at least on that point has been better. The illusion that the fed has a set of levers that will make the economy sing is quite silly. Whoever is the next chair should take a hippocratic-like oath, to first do no harm.
My ideal candidate would be someone who could implement something like the Taylor rule - which would stabilize fed policy. But in this administration that is not likely to happen. Thus, while I am not a fan of Summers, I am not sure that this choice actually makes a lot of difference in long term economic policy.