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Bhide: Wanted: A Boring Leader for The Fed

Posted by Larry Doyle on August 21, 2013 7:22 AM |

bhide_2008_smallSo who should be the next chairman of the Federal Reserve?

While we are fed a regular diet of drivel from those who might believe they know what is in the best interest of our nation, these political insiders might want to look a little further for truly informed opinion. To whom should they listen?

I would suggest they lend an ear to Amar Bhide, a professor at the Fletcher School of Law and Diplomacy at Tufts University, who provides real sense on cents on this topic.  

The debate over who should succeed Ben S. Bernanke, the chairman of the Federal Reserve, has been exceptionally personality-driven. Supporters and opponents of the two leading contenders — Lawrence H. Summers, a former Treasury secretary and adviser to President Obama, and Janet L. Yellen, a Clinton administration veteran like Mr. Summers, and now the Fed’s vice chairwoman — have been feuding in public. Mr. Obama has called the decision, which is expected soon, one of the most important of his presidency.

What all sides seem to misunderstand, however, is the proper nature of the central bank’s role in the economy. Instead of casting about for a new maestro, we need to return the Fed to dullness and its chairman to obscurity.

The Fed has become anything but boring. Under Mr. Bernanke and his predecessor, Alan Greenspan, it didn’t foresee the housing bubble, much less try to pop it. Even if the Fed could identify bubbles, Mr. Bernanke once said, “monetary policy is too blunt a tool for effective use against them.”

Yet for more than four years, the Fed has used this blunt instrument on an unprecedented scale. It is currently buying $85 billion in Treasury securities every month, the third round of a strategy, known as quantitative easing, that aims to stimulate the economy by keeping interest rates low.

Mr. Bernanke’s supporters say he has done his best with monetary policy while a do-nothing Congress has offered no help through fiscal policy. But quantitative easing has amounted to an audacious experiment in trickle-down economics. Among other things, it has artificially boosted the stock market in the hope that enriching a few — the top 1 percent of American households owned 42 percent of the nation’s financial assets in 2010 — will help the many. Meanwhile, retirees who don’t dare buy stocks have seen their modest bank deposits stagnate with interest rates near zero (despite a recent significant increase in Treasury yields).

Economists hate to admit it, but the profession is as much faith as science. “If we speak frankly,” John Maynard Keynes once wrote, “we have to admit that our basis of knowledge for estimating the yield 10 years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence.” Even in medicine, where double-blind experiments with control groups are de rigueur, the evidence of efficacy is far from ironclad; for economic policy, it is even less so.

Supporters say Mr. Bernanke has made up for his lack of prescience before the Great Recession through his bold emergency rescue actions, coordinated with President George W. Bush and then President Obama, and his willingness to do “whatever it takes” to get the economy moving, despite the potential risks of inflation down the road.

But wittingly or not, the mild-mannered Mr. Bernanke has made his job even more prominent than it was under Mr. Greenspan’s 19-year tenure. Such concentration of power within the Federal Reserve Board in Washington is precisely what Congress did not intend when it created the central bank in 1913.

The Fed’s chairmen in recent decades have been eminently qualified individuals of undisputed probity. But they are humans, too, whose blind spots, egos and potential conflicts of interest — Mr. Greenspan has had a lucrative post-Fed career giving speeches and advice — raise real concerns about hubris, even bias. The solution is not to subject the Fed to the whims of a dysfunctional Congress but rather to scale back what we can expect of it.

Counting on monetary policy to secure full employment is like attempting vascular surgery with a dull ax.

A Sense on Cents instant classic line if there ever was one.

Diversity and dynamism are vital features of our economy. As home building in Nevada collapsed, fracking in North Dakota boomed. Facebook and Apple surged while AOL and Yahoo stumbled. Across-the-board interest-rate suppression is just as likely to pump up already surging sectors as it is to revive slumping ones. Property prices have soared in Manhattan, while Detroit is in a death spiral.

Commanding the Fed to eliminate price fluctuations is also asking too much. The prices of bananas can fluctuate even across neighboring supermarkets. Each of us has our own consumption basket and inflation rate. The overall inflation rate is important — as Mr. Greenspan’s predecessor, Paul A. Volcker, demonstrated in the early 1980s when he crushed inflation at the cost of painful, back-to-back recessions — but only at the extremes.

Where the Fed must be held more accountable is for its oversight of banks. It is banks, not the government, that effectively create most of the money we use, by extending credit where it is most needed. As we’ve painfully learned, banks can over-lend and even set off an economic collapse.

Before the crisis the Fed seemingly lost all capacity for the painstaking, boots-on-the-ground supervision of the banks under its purview. And, effective or not, top-down monetary interventions remain attractive to the Fed’s top brass. Running what amounts to a hedge fund on steroids is more glamorous and exciting than managing a regulatory bureaucracy. Perhaps the most important qualification for the next Fed leader is one all too rare in Washington: humility.

Amar Bhidé, a professor at the Fletcher School at Tufts, is the author, most recently, of “A Call for Judgment: Sensible Finance for a Dynamic Economy.”

I concur and would only wish that we had people like Bhide involved in the oversight of our financial regulatory system. I am convinced we would be better off.

Navigate accordingly.

Larry Doyle

Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.


  • Jim

    American Banker writes the following on this topic:

    Why Roger Ferguson May Be the Next Fed Chair

    Roger Ferguson could be President Obama’s Goldilocks candidate for Federal Reserve Board chairman.

    Someone not too hot (Larry Summers) or too cold (Janet Yellen.) Someone just right.

    Ferguson has been a Fed insider like Yellen, serving as vice chairman from 1999 to 2006, and, like Summers, holds a PhD from Harvard. As CEO of TIAA-CREF since 2008, Ferguson has seen the financial markets up close and personal. Last year, he led a tough Group of 30 analysis of corporate governance at financial companies.

    Ferguson’s name surfaced last Spring when folks started focusing on the fact that Ben Bernanke’s second, four-year term as Fed chairman would end on Jan. 31, 2014.

    The New York Times fingered Ferguson as a possible successor to in late April. Even earlier, Neil Irwin of the Washington Post laid out the possible candidates and concluded Ferguson ranked third behind Yellen and Summers.

    But Ferguson faded as the alternative candidate to Yellen and Summers, once Obama mentioned Don Kohn, another former Fed vice chair, in a private meeting with Democrats. The 40-year Fed veteran retired in 2010 and is now a senior fellow at the Brookings Institution and a member of the Bank of England’s Financial Policy Committee.

    But Kohn will turn 71 in November, which puts him on the old end of the spectrum of candidates. Ferguson is a decade younger. [Yellen just turned 68 and Summers is 58.]

    Summers joined the Obama administration at its start and served as director of the National Economic Council for two years. The White House seems determined to nominate him, even taking the unusual step recently of telling his critics to back off.

    The administration may want someone from “their team” at the Fed’s helm for the last years of Obama’s presidency – the period that’s likely to form his legacy.

    Economic growth is a key factor in any president’s popularity and the White House is right to conclude that the Fed chair will play a crucial role as the central bank unwinds its easy-money policies.

    But getting Summers confirmed will cost the White House. It’s impossible to predict the deal’s specifics, but it won’t come cheap. Summers has enough adversaries on the Hill and Yellen has plenty of allies.

    It could still happen, but it won’t be easy.

    Personally, I’m still pulling for Yellen. She’s clearly qualified and the first female Fed chair would be a big deal. Many women in the Senate agree, and that’s where this confirmation battle will take place.

    But I have to admit Yellen hasn’t done herself many favors since this contest heated up. She declined to talk to the Wall Street Journal when it profiled her and decisions like that create a vacuum that others’ opinions then fill.

    People are questioning whether she’s a “real leader,” whether she is “dynamic” enough. It’s sad but true, like too many women, Yellen is not much of a self-promoter. Of course, this has little to do with how she’d do the job, but it does factor into landing it.

    If Obama doesn’t nominate the first female Fed chair, then he could nominate the first African-American one in Ferguson.

    The Old Boys Club will never be disbanded if leaders like Obama don’t seize opportunities like this one.

  • fred

    After over 30 years of BMIR, we might finally be beginning to find out that the risk free rate doesn’t mean risk free.

    Some might argue that “Helicopter Ben” Bernanke was the “right” person for the job given the situation in 08-09, however, politics as usual and political correctness may not provide the “right” solution going forward.

    Given the duration of interest rate trends, the “right” person for the job is probably toiling away in obscurity because his/her thoughts and ideas are considered “out of step” with reality.

  • fred

    I concur with Prof Bhide, the Fed needs to hire more forensic accountants (talk about boring) and fewer economists and financial alchemists.

    If “mainstream” thought agreed, however, we’d be hearing much more about someone along the lines of a Sheila Bair or Prof Bahide for that matter.

  • EB

    Close the Fed

  • LD

    The next chair of the Fed must be knowledgeable about monetary policy but need not be a monetary expert and need not be an academic. Only two post-accord Fed chairs have had academic credentials.

    What the US and the world need is a Fed chair who will shake up the institution. They must be an effective manager as well as an intellectual leader who implements a transformation of the Fed as it enters its second century. That person is more likely to be a well-informed outsider than an entrenched insider.

    The writer is a senior fellow at the Peterson Institute for International Economics and was a division director at the Federal Reserve Board from 1977 to 1998.

    The New Fed Chair Should Not Be One of The Usual Suspects

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