With Ben Bernanke prepared to step down as Federal Reserve chairman within the next year, the human resource debacle of locating the next Federal Reserve chair is underway.
Despite reports of Timothy Geithner, Alan Blinder, or Roger Ferguson being modest replacements (the latter I personally endorse), it seems that the candidacy has been narrowed to two.
The next Federal Reserve chair will be a choice between one of the biggest enablers of the financial crisis, Larry Summers, and the more-qualified, but politically unknown, Janet Yellen.
Here's my insight on each candidate...
What a Summers Federal Reserve Would Look Like...
Summers was an enabler of the 2008 financial crisis. I noted recently that Summers should not be given the keys to the kingdom, for his track record is abysmal.
Some policy wonks like Ezra Klein have said that the president and his administration value Summers for his ability to navigate a crisis. The Obama administration is masterful at public relations campaigns in the wake of a crisis, and advisors have shown deep concern that this economy could turn on its side at any time.
With concerns about China on the rise, European headwinds always on tap, and global unrest now a chilling warning to overpromising and underperforming governments, the Obama administration seems more concerned about handling a crisis than preventing it in the first place.
Hence the likely appointment of Larry Summers, who has a terrible reputation in regard to playing well with others, and a track record of bank-friendly policies like the gutting of Glass-Steagall. As I noted, Summers was also one of the key figures in destroying Brooksley Born's reputation in Washington in the late 1990s when she argued for greater oversight of the derivatives market. In addition, he ran the Harvard endowment fund into the ground and has a rather nasty record of misogynist opinions.
Some have argued that Summers has a better reputation than he actually does, and that he will provide stability in the markets because investors know him. But in my view, he's just more of the problem and less of the cure. Not only will his ego get in the way of his ability to cure market jitters, but he also is a principal subscriber to the notion that Keynesian alchemy will cure our woes over the long term.
Summers has noted that he thinks that the Fed's injections are not curing the problems in the nation's economy, which would be encouraging if not for this quote in 2011. Wrote Summers: "The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending."
It's impossible to take a statement like this seriously. With Summers, expect more of the same. More spending, more printing, and more false promises boosted by the ridiculous idea that expansion at the Federal Reserve will do anything to sustain this country in the long-term.
Summers represents everything that's wrong with Washington, a man who has never been held accountable for his actions, and we'll be the ones picking up the tab once his continued streak of "success" pummels the middle class. The Federal Reserve and Wall Street are now so short-term minded that it's becoming impossible to understand what to expect unless you're a part of their elite club.
What men like Summers don't understand is that the American economy is not a laboratory. It is full of human beings with hopes and dreams and goals and families. His friends on Wall Street will make out with huge bonuses and second yachts. A Summers' candidacy shows the staggering disconnect between Washington and the rest of the United States.
What a Yellen Federal Reserve Would Look Like...
Since 2010, Janet Yellen has been Vice Chair of the Federal Reserve, serving as Ben Bernanke's lieutenant.
Her supporters describe Yellen as a "soft-spoken, even-tempered, 100% mainstream academic economist who boils the world down to simplistic concepts such as aggregate demand shortfalls and wealth effects, justifies decisions with research papers that are steeped in dubious assumptions, and enjoys strong support from liberal Democrats."
She's a genius and certainly the more qualified to assume her boss's desk.
But that's not a good thing.
The primary case against Janet Yellen has been her lack of political involvement in the last two decades. Simply put, President Obama likely doesn't know anything about Yellen, which means that because she doesn't rub elbows with the political class, she doesn't improve the chances of her candidacy.
Despite her success in preventing crisis in the mid-1990s and her risk-averse positions on regulation, she will provide some jitters to the market. Many have said that she will be tough on the banks, which is why many oppose her candidacy.
Everyone knows what they'd be getting from Larry, an enabler of crisis, and that's why the market wants him. Meanwhile, with Yellen, it's unclear whether she would live up to her longstanding "dove" reputation.
It is certainly problematic that Yellen comes from the academic mold that treats the American economy more like a video game than it does in understanding how its policy has real impact on the average American.
However, she has been ranked as one of the top economists for her ability to provide accurate forecasts, which would provide a bit more stability for key decision makers.
The world would be better off if it didn't have an enabler in Summers, or a pure academic who treats the markets like a laboratory in Yellen.
That said, the latter is the better of the two, and certainly Yellen would offer a far easier confirmation hearing than the Wall Street-connected Summers for the risk-averse Obama administration.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.
At this point the concern is who sits in the white house not who is the fed chair.
I agree that Summers in his support for the repeal of Glass-Steagall and his opposition to oversight of derivatives should disqualify him but let's recall that he wasn't alone. Those were also the positions of almost all Republicans and Greenspan.
A red flag goes up when I read that Keynesian economics is "alchemy". I no longer have any confidence in the opinion of an economist who would say such a thing. I also find the comment that Obama is more concerned with managing a crisis than preventing one to be a low blow with absolutely no merit.
As for Yellen not being political, that is a big plus for her. The writer obviously is political with an ideological warp.
Darn right Bernanke is an alchemist. He is in completely uncharted waters right now, and any economist would know that there are far more structural problems that he is not addressing… nor are the central banks. None of this has been done before. This pumping is on another level of experimentation and false science. When the money goes away, watch the reaction. This emphasis on aggragate demand isn't addressing reality — and at some point they will want to raise taxes and kick inflation in hard.
And if you don't think that Yellen not being political is a problem, you have to see Washington for what it is. This reads like a soft endorsement of her, but recognizes that she isn't the political animal that the former Goldman folks are. Summers is practically kicking down the door.
Wow. So much puffery, blather and simply misguided claims.
The deficit is not exploding….its actually shrinking (http://www.cbo.gov/publication/44172). And, while the debt is expected to continue to grow in the near future, it shrank earlier this year. The reality is that we’re not going to pay down the debt by taxing more or reducing spending, although we could likely pay off the entire $16Tr in a year if we stopped spending (entirely) cold turkey and increased everyone’s taxes by 10% across the board. Nonsensical idea, but that would be some serious structural change. And, we know from the European experiment that it would fail to yield the results its supports claim. While here in the US we see marginal improvements with only Fed intervention, which is relatively limited given their mandate. No, we’re going to pay down the debt by growing. So, our focus should be on growth. That requires a Congress that has a collective brain. When Congress realizes this, we will begin to improve….albeit slowly. And, as for the Triffin point, tell me what reserve currency stands to replace the dollar? I thought so. We have a long way to go before we get there.
As for alchemists, I could buy into Reinhart-Rogoff, Paul Ryan and the Austrian school crowd if they didn’t falsify their spreadsheets to make the case for austerity. That is alchemy at its worst. Their math was wrong at the outset, as they even admit now, and their theory, when put to the test in real world Europe, has failed to deliver.
Uncharted waters yes, but the indicators continue to support the views of Keynes and Samuelson, not Hayek. There is no evidence whatsoever that austerity will resolve the current global economic crisis.
Well, Yellen can print money to continue bubbling the economy and creating a false hope for the poor investors that will soon learn their fate, Summers might have spoken the truth and that would be a bad match for the demonic faith of the federal government. God forbid truth honesty and free will might be granted to the American public.