Dear Diary Reader,
Dad is recovering from my sister’s wedding. She got married over the weekend at the family place in Maryland.
There’s no regular Diary entry from him today. But Dad will be back with his regular update tomorrow.
In the meantime, here is a “classic” from the archives in which Dad announces his candidacy for the next chairman of the Federal Reserve.
If you want to support his campaign, go to this urgent poll and vote for your favorite candidate to replace Bernanke. It’ll take two minutes of your time.
Once you’ve voted, please feel free to forward this email on to your friends and family.
This poll is creating a huge “buzz” on the Internet. And it’s your chance to help stop someone such as Larry Summers from taking over the controls of America’s central bank.
Thanks and best regards,
Publisher, Diary of a Rogue Economist
Cometh the hour, cometh the man.
Or the woman…
Ben Bernanke is leaving the Fed at the end of the year. He must shuffle off to some post where he will do less damage. The leading candidates to replace him are committed to continuing his policies, which consist of providing as much credit rope as you need to hang yourself.
People come to think what they need to think when they need to think it. When they approach the “end of their rope” phase of a financial catastrophe they need to believe that they have no choice but to play out a little more line.
Doubts give way to desperate faith. Reflection is abandoned for action. All of the announced candidates for Bernanke’s job – Yellen, Summers and Kohn – are believers.
Of course, they couldn’t have gotten anywhere near the top job if they doubted that central planning and price controls can work. After all, they’re jockeying for the job of planning the entire US economy by controlling its most important price: the price of credit.
As to Yellen, Summers and Kohn, we would reject them all. Clearly, none has any idea what is coming his way or he wouldn’t want the job. But this is a minority opinion. So let’s keep an open mind and examine each of these candidates separately.
Janet Yellen has three things going for her. According to Alan Blinder’s recent piece in The Wall Street Journal, she (1) is a woman, (2) is a good diplomat and (3) has been around the Fed since 1990 and nothing bad has happened.
We offer a trio of replies. (1) There are roughly 120 million adult women in the US; womanhood is not a qualification for the job. (2) Diplomacy is irrelevant. (3) Having been around since 1990 is a disqualifier. Yellen was at the Fed as US total debt rose from about 230% of GDP to over 350%. If she had had her wits about her, she would have realized that the Fed was enabling a huge credit bubble that would one day burst. Yellen should be passed over.
This third argument also disqualifies Don Kohn, a Fed insider for the last 40 years. The Washington Post describes Kohn as “the consummate Fed veteran” and Alan Greenspan’s “right-hand man.”
Well, that pretty much eliminates him. When Alan Greenspan took over as Fed chairman, the US had a statutory debt limit of $2.8 trillion. Today, there is $16.8 trillion of US government debt – much of it accumulated during the 19 years while Alan Greenspan was in the chairman’s seat, with Don Kohn on his right side.
When Greenspan took his post at the Fed a total of about $250 billion of US debt was in foreign hands; today it is $5.6 trillion. Greenspan, with Kohn as his sidekick, blew up the debt that later blew up the US economy.
Then, after Greenspan left the Fed in 2006, Kohn kept at it. From The Washington Post: “He was Bernanke’s No. 2 during the financial crisis.” As his oft-repeated public comments make clear, Greenspan had no idea what was going on. Evidently, neither did Kohn.
The Washington Post also says he has “credentials as a crisis manager.” But the Fed reacted to the crisis like a crowd in a nightclub fire: It panicked.
Instead of allowing a credit crisis to smoke out the weakest debtors, it rushed in to save them all – offering them all more debt on better terms. Bankers who had made the biggest errors were left unpunished. Instead, they were rewarded with lower, Fed-guaranteed borrowing rates.
“You boys got yourself into a little trouble,” said the Fed cop on the beat. “But here’s a new Corvette… and a bottle of Jim Beam. Go have a good time.”
As to Larry Summers, what can we say that isn’t already public record? That he blew up Harvard’s endowment is well documented. That he is “brilliant” is also beyond dispute. But that is the problem. Even Summers believes it.
Make YOUR Voice Heard Right Now: Cast Your Vote for Bernanke’s Replacement…
Normally, folks like you and me get no vote in the selection of Fed chairman. Not surprising, even though we’re overwhelmingly affected by their monkeying with the economy.
But that ends today. Because you can vote for Helicopter Ben’s replacement in this urgent poll. Hurry up and make your voice heard – because Obama could make an announcement on the next Fed chairman candidate any day now.
So go here to vote now.
“Brilliance” is defined in a description of Summers that also appears in The Washington Post:
You can bring him up to speed on anything in 15 minutes. And if you can be interesting enough to keep his attention for half an hour, he will start throwing out hypotheses and what-ifs and suggesting connections you would never have thought of.
The brilliant man has a brain that spots “connections.” These lead to “hypotheses” – visions of the future as it might be. As he becomes more brilliant, even God himself is dazzled. But in contrast to the deity, Summers is at an existential disadvantage: He has no idea what will happen next.
The wise man has an advantage over the brilliant man. Socrates himself pointed it out. Brilliant men think they know something. Socrates knew his limitations. He knew he know nothing.
Larry Summers is no Socrates…
Let’s be frank. The worst of these candidates is Larry Summers. That is why he is most likely to get the post.
Summers is so often described as “brilliant” that we are beginning to wonder about the word itself. Perhaps it’s coming to mean something else.
Maybe “brilliant” is coming to mean “not quite bright,” which would better describe Larry Summers. He is the Tom Friedman of the financial world – always sure of himself, always with an answer to every problem… and always mildly retarded.
The real problem with Summers is that he lacks modesty. He is so sure he knows what is going on he leaves no margin for error. Every problem has a solution, he thinks. And he has it!
The Pain of the Unemployed
Brad DeLong, writing in the Financial Times, judges all the leading candidates to replace Bernanke as “excellent.” But he describes Summers (also a Financial Times columnist) as “slightly more excellent.”
DeLong’s criteria for “more excellent” seems to be based on the idea that Summers is “the most creative thinker around.” Which just goes to show how far central banking has come.
Throughout most of history what people wanted in a central banker was lack of imagination. Central bankers were supposed to keep a lid on money creation. In the time of Edward II, for example, if the warden of the Mint got creative with the realm’s money, they cut his private parts off.
But now DeLong maintains that “these times are not normal” and that the new person at the Fed must “feel the pain of the unemployed in their viscera.”
Perhaps English is not DeLong’s native tongue. Or perhaps he really thinks unemployed people have some kind of pain in their viscera. And perhaps he thinks America’s banker-in-chief should feel it.
Why? DeLong doesn’t explain. We are left to use our imaginations. Presumably, he thinks Summers is the man for the job because (1) he feels the pain of the non-working man and (2) he has the creative imagination to help the poor man find a job.
Ben Bernanke had little success at this. Even after disappearing 9 million people from the workforce, the official number of unemployed has barely budged.
Then again, maybe a more “brilliant” Fed chief will be able to do something extra.
But what can he do?
More credit? Cheaper lending rates… perhaps below zero? More creativity in central banking?
Wasn’t Bernanke creative enough? In his enthusiasm for ZIRP, QE, Operation Twist and other monetary innovations, he forgot the basics. Maybe if he’d just stuck to the essentials more people would have jobs.
The entire thing is a setup and designed to bring into focus the one candidate who everyone agrees is “brilliant”: Larry Summers. Whom do you call when times aren’t normal? Who else has such a brain? Quick as a viper, agile as a flimflam man and as penetrating as Rust-Oleum? Yes, for these reasons, the insiders believe Larry Summers is increasingly finding favor in his master’s eyes.
But what if times really were rather normal? And what if Summers really weren’t so brilliant, after all?
Reason Without Limits
Let us deal with the second question first…
We set aside the fact that Summers managed to turn almost the entire Harvard faculty against him… and that he cost the Harvard endowment a billion dollars, thanks to his wrongheaded interest rate speculations.
Let us look at a larger and more obvious failing.
In 2005, in Jackson Hole, Raghuram Rajan (who was recently appointed to take over at the Reserve Bank of India) laid out the contours of the financial bubble to an audience that included Larry Summers.
Rajan warned it would pop. No special analysis or deep thinking was required from Summers. He didn’t have to figure it out for himself. He just had to pay attention.
In the event, he did pay attention. And, as is his habit, he misunderstood. “The basic, slightly Luddite, premise of this paper,” he commented, “is largely misguided.”
Get it? Summers thinks that any mention of cycles or limits is anti-progress.
We read Summers’ commentaries regularly in the Financial Times. We don’t recall a single insight worth repeating or a single proposal that merits further discussion.
Like Tom Friedman at The New York Times, he sees problems everywhere and finds solutions for them readily. And every solution he comes up with would be neat, logical and disastrous.
Unintended consequences? Has he ever heard of the concept?
For Summers, reason has no limits… intervention has no risks… and the world has no Black Swans.
Whatever It Takes
Which brings us to the second question: How abnormal is this situation?
The US switched to a fully fiat-based monetary system in 1971. With this new paper money Americans could borrow a lot more money than before.
Was it not normal that they did so? Total debt went from about 150% of GDP to 350%.
Then, in 2007, when even unemployed household pets had mortgages on houses at inflated prices, was it really surprising that lenders panicked? Every credit bubble is followed by a credit bust.
What’s not normal?
The feds panicked too. Rather than let a correction do its work, they stepped in.
First, a $700 billion program under President George W. Bush (with $23 trillion of additional guarantees). Then another $700 billion under President Obama. Then the Fed went to work with ZIRP, QE I, QE II, Operation Twist… and QE III. Isn’t that just what you’d expect?
The Fed will do “whatever it takes” to keep the money flowing.
The dollar of 2006, when he took over at the Fed, is now worth only about 88 cents in today’s money (depending on whose numbers you believe).
Which leads to our suggestion…
First, let us learn from the 14th century. When Ben Bernanke leaves his post, cut his privates off. That will be his going-away present.
After all, he failed at his most important job: to protect the value of the nation’s money. This will also serve as a reminder to his successors: Don’t use your imagination. Stick with policies that work.
Second, when it comes to public service, your editor/speaker is against it. But perhaps once in a lifetime he hears the keening lament of the Motherland: “Help me, please.”
So he offers his service…
Enter the Dark Horse…
Yes, dear reader, if we were asked politely, we would serve as the next chairman of Federal Reserve.
We alone among the candidates have the qualities needed to avoid the financial disaster coming our way. We alone understand the proper and modest role of central banking. And we have our plan of action already worked out.
That is, we wouldn’t wait for Humpty Dumpty to get higher up on the wall. We’d give him a push. Get it over with.
So write to your congressman, your senator, your president… and to Santa Claus. Ask them to support our candidacy for Fed chairman.
We don’t guarantee better results. But we guarantee that we will be more fun to watch.
President Obama should call the NSA. They’ll know how to get in touch with us.
We don’t expect to hear from the president immediately. It will take him a few days to figure out that his leading candidates for Fed chairman should turn their talents elsewhere – maybe to polishing the White House silver.
Don’t discount President Obama’s concern for things that don’t matter. He could go for Yellen simply for anatomical reasons. As we just explained, a central banker who fails in his No. 1 duty – to protect the nation’s money – should be castrated. At least in that sense, Yellen has an edge.
Normally, no one would know or care who got the job at the Fed. But everyone says these aren’t normal times. They all seem to think the times call for an extraordinary person… a “brilliant” person.
After all, who else would be able to carry out the mission President Obama has outlined for him: to keep the economy growing, hold inflation in check and make sure we don’t create new instabilities? A tall order.
But adding more credit to an economy that already suffers from too much doesn’t really help. Nothing unnatural about that, either. The economy didn’t revive. These policies just pushed up prices for rich peoples’ assets.
Most people got nothing from this monetary and fiscal hullabaloo. There were 116 million Americans employed in 2008. There are only 113 million today. And the population has grown by 8 million people in the meantime. What’s more, many more of today’s jobs are in the low-paying service sector.
What’s not normal? And what brilliant innovations will Larry Summers come up with to mask the fact that the Fed’s activism doesn’t work?
What’s needed is not brilliance at all, but dull forbearance. We need normal policies for a normal period of de-leveraging.
So far, only one candidate for the Fed chairmanship has demonstrated the lack of brilliance required. He alone understood what was happening in 2005-2007 and he now appreciates the limits of central bank activism. You know who that candidate is: yours truly.
Repeatedly, he warned, in sober economic terms, that “this Vesuvius of debt” was “going to blow sky-high” (or words to that effect).
Then, when the lava flowed in 2008-2009, he foresaw the Fed response and predicted that it wouldn’t do “a damned bit of good.”
And now he knows what to do. The Fed should back off. Sit tight. And let markets do their work.
It’s time for a change.
Mr. Obama, we’re standing by the phone…
Editor’s note: Don’t forget to have your say in our urgent poll about who should and shouldn’t be running the Fed. And please also forward this article on to anyone who you think might be interested in voting too.