Felix Salmon on why Summers should not lead the Fed

Here’s a really good article by Felix Salmon:

As a result, Obama should be bending over backwards to appoint not the candidate who can best manage a financial crisis, but rather the candidate who is most likely to stop a crisis from happening in the first place. That candidate is Janet Yellen. (Or maybe Mark Carney, but he’s taken.)

Obama, it seems, has a dangerously heroic view of what the Fed chair does. There’s the day-to-day managing-the-economy thing, which, meh, there’s no difference between the candidates. And then there’s the swing-into-action thing when a crisis hits, and you want to be able to call upon the great Larry Summers to reprise his role as a key member of the Committee to Save the World.

The reality, by contrast, is that the day-to-day actions of the Fed chair, both in terms of monetary policy and in terms of bank regulation, are all that really matters. If a crisis hits, we already know what the Fed will do, whoever is in charge.

And here’s another very good story:

Federal Reserve Chairman Ben S. Bernanke and his colleagues meeting next week are poised to take two steps that appear inconsistent.

They will probably lower their estimates for growth for this year and next for the third consecutive time. Simultaneously, they are forecast to start scaling back the $85 billion in monthly bond purchases they have been relying on to stoke the recovery.

What’s more, annual inflation has been running at least a half percentage point below the Fed’s goal since December. And while the unemployment rate, at 7.3 percent in August, is falling, that’s mainly because some Americans are leaving the labor force.

“As a central bank, you are lowering your growth forecast, inflation is running low, and hiring is slowing and you are going to taper your asset purchases?” said Julia Coronado, chief economist for North America at BNP Paribas in New York and a former member of the Federal Reserve Board’s forecasting staff. “That is a communications challenge.”

PS.  Summers is already hurting the recovery, and he’s not even nominated yet:

A report in a Japanese newspaper that ex-U.S. Treasury Secretary Larry Summers will be named as Ben Bernanke’s replacement as chairman of the U.S. Federal Reserve sent the dollar up Friday morning.

 


Tags:

 
 
 

10 Responses to “Felix Salmon on why Summers should not lead the Fed”

  1. Gravatar of benjamin cole benjamin cole
    13. September 2013 at 07:41

    Yeah, well, NHK Japan just reported Summers will get the nod…

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. September 2013 at 08:21

    Maybe the new President, Vlad Putin, will step in here too. After he’s through with directing our foreign policy..

  3. Gravatar of jknarr jknarr
    13. September 2013 at 08:24

    Need to give this another read (to see what is ahead for the US).
    http://www.sfu.ca/~kkasa/summers_AER00.pdf

    You know, he very nearly single-handedly build the systemic risk monstrosity that is the US banking system.
    1) Got rid of Glass-Steagall when Treasury secretary.
    2) Fought derivative regulation.

    So in this liability shell game, Larry helped get commercial banks into the derivative business, then helped them build it up to a $600 trillion counterparty risk, at which point they they rewrote the law to make derivatives super-senior; and then switched the derivative book over to the commercial bank holding company. Now your and my bank deposits are first-loss collateral.

    Priceless. I can’t wait to see his next stability-enhancing acts as Fed chair. This is like the seventh seal being opened or something.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. September 2013 at 09:23

    Summers, whatever his faults, did not ‘get rid of Glass-Steagall’ (at least not the legal separation of deposit banking and investment banking, those provisions–#16 and #21–are still law).

    Nor, contrary to the Myth of Brooksley, did he fight regulation of derivatives. He only fought Brooksley Born’s attempted power grab. The derivatives in question back then (interest rate and foreign currency swaps) were already regulated through banking and securities laws.

    Nowhere in any speech or writings of Brooksley Born will you find her mention Credit Default Swaps, until 2009. She doesn’t even appear to have known what CDS were back when Summers was Treasury Sec’y.

  5. Gravatar of jknarr jknarr
    13. September 2013 at 10:02

    1) He was only Treasury secretary when they (yes, effectively) eliminated G-S.

    2) Ooh, I love myths — can I hear the Myth of Clinton, too?
    http://www.bloomberg.com/news/2010-04-18/clinton-says-rubin-summers-gave-him-wrong-advice-on-derivatives-rules.html

    Poor Larry, so misunderstood.

  6. Gravatar of Aidan Aidan
    13. September 2013 at 10:23

    Two things about the Salmon piece:

    1. “As a result, Obama should be bending over backwards to appoint not the candidate who can best manage a financial crisis, but rather the candidate who is most likely to stop a crisis from happening in the first place.” I couldn’t agree more. It drives me nuts that the administration’s only been making the case for Summers based on the assumption that we will be facing a financial crisis in the very near future. Why are they convinced or trying to convince people that their economic policies are going to lead to a crisis so bad that only Larry Summers can save us? Do they know something we don’t?

    2. “The reality, by contrast, is that the day-to-day actions of the Fed chair, both in terms of monetary policy and in terms of bank regulation, are all that really matters.” I’d argue that that’s not really true. If so much of monetary policy is conducted through forward guidance and the expectations channel, a clear idea of how the Fed is going to behave in the future seems more important than the day-to-day actions of the Fed chair – or, at the very least, it’s important in addition to day-to-day actions. I guess you could argue that day-to-day actions are how future policy intentions are communicated, but I still think it’s a stretch.

  7. Gravatar of ssumner ssumner
    13. September 2013 at 12:22

    jknarr, Actually deregulation had almost nothing to do with the crisis. The stuff banks were doing in the 2000s they were also doing in earlier decades, just less of it. Deregulation had no impact on firms like Lehman.

    Getting rid of Glass Steagall had no role in the crisis.

  8. Gravatar of jknarr jknarr
    13. September 2013 at 14:03

    Scott, I’ll beg to differ — firsthand, profit margins were crushed by commercial banks entering IB space. Commercials were morally-hazardous-taxpayer-insured, had cheap deposit funding, wanted the underwriting business, and would pay up to get it. Commercial banks would also tie access to their business lending to getting the underwriting deal, and forced margin-shrinking concessions onto IBs.

    Shrunken profit margins changed behavior quite a bit — more leverage, wackier structures, low-quality, and yes, less fiduciary duty to the clients.

  9. Gravatar of Joe Eagar Joe Eagar
    13. September 2013 at 15:30

    We all know what’s going on here. Summers was promised the Fed chair by Obama; it’s well documented in Bob Woodward’s book. The man was incensed when Obama reappointed Bernanke instead.

    Simple, stupid, blind loyalty. Unfortunately, this is all too common in government. But the Fed is different: for the past few decades, Fed chairs (Volcker, Greenspan, and Bernanke) have been chosen on merit, not political connectivity.

    Let us all hope Obama sees reason and appoints Yellen.

  10. Gravatar of ssumner ssumner
    14. September 2013 at 05:50

    jknarr, Competition doesn’t cause reckless behavior, moral hazard does.

Leave a Reply