Thursday, September 19, 2013

Roger Lowenstein: Obama should name banker, not economist, to Fed

In a Bloomberg column that sent fear through macro economists everywhere, Roger Lowenstein laid out the case for why Obama should appoint someone other than a macro economist as the next chairman of the Fed.

Mr. Lowenstein looked at the task at hand and identified what he felt were the credentials the next Fed chairman should have.

Rather remarkably, your humble blogger possesses these credentials.

Mr. Lowenstein left out the two most important credentials for the next Fed chairman.

First, did they predict the financial crisis.  This is important because it strongly suggests that they had an insight into why the crisis occurred.

Second, do they have a plan for ending the financial crisis and restoring the economy and financial markets to normal functioning based on this insight.

I have written extensively on this blog about how I would end our bank solvency led financial crisis.  Virtually every aspect of my plan can be implemented by the Fed chairman.

As the head of bank regulation, the chairman has the power to bring transparency to the banking system and require banks to disclose their current global asset, liability and off-balance sheet exposure details.

As the head of monetary policy, the chairman has the ability to raise short-term interest rates above 2% and eliminate the economic headwinds caused by ultra-low rate monetary policy.

Mr. Lowenstein observed:

But the next chairman will have to decide when to trim the Fed’s portfolio, swollen with its extraordinary program of bond purchases. And it will have to raise short-term interest rates, which are currently near zero. It may be sooner, it may be later -- the moment will come. 
Money cannot be free forever. 
To make this decision, the Fed should be led by a fresh pair of eyes -- one not compromised by its current policies....
And what will these fresh pair of eyes see?
ultra-low interest rates are punishing savers and discouraging thrift, not a healthy condition. 
Investors are responding to razor-thin yields by “looking for yield” in suspect places. (Rwanda offered $400 million of debt this year, and the issue was wildly oversubscribed.) 
As we’ll recall from the mortgage crisis, chasing yield can lead to big trouble....
If ultra-low interest rates worked as a monetary policy for ending a bank solvency led financial crisis, then Japan's crisis should have been over years ago.  Instead, Japan has had ultra-low interest rates for 2+ decades.

In addition, there was no reason to believe ultra-low interest rates would work as Walter Bagehot, the founder of modern central banks, set the minimum interest rate at 2%.  He observed that there are changes in economic behavior that occur below 2%.
History suggests that moving away from zero rates will be unpopular and difficult -- especially for a Fed on cozy terms with the White House....
Actually, moving away from zero rates would be incredibly popular with individuals who save and invest.

Moving away from zero rates would be unpopular with the banks.

For those of us who are concerned with fixing the financial system and restarting the economy, winning popularity contests is not a consideration.
If the next chairman isn’t a Washington hand, who should it be? 
It is too soon after 2008 to tap an executive from Wall Street, which bundled the toxic mortgages at the heart of the crisis. That rules out William Dudley, president of the New York Fed and a former Goldman Sachs Group Inc. economist. 
There is no head-hunting recipe for a Fed chairman, but knowing a little institutional background helps....
I got this credential covered.
In recent times, the Fed has been dominated by policy makers. Bernanke was an academic and then a government official (Yellen has a similar background, though she also ran the San Francisco Fed). Greenspan was a consultant and adviser to President Gerald Ford. Geithner was a Treasury official before taking over the New York Fed. 
But Paul Volcker, the most independent Fed chairman in history, was a banker -- president of the New York Fed and an economist at Chase Manhattan Bank when Chase was a lender to corporations....
I got the banking credential covered.
Rather than look for a consultant, an academic or a regulator, Obama should nominate a chairman with an institutional grasp of the banking system.
I have the required institutional grasp of the banking system.

Regular readers have read literally hundreds of posts that I have written on how a modern banking system is designed and how it can be used to end our financial crisis.

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