Friday, July 31, 2009

Handicapping the field

Willem Buiter breaks down the plusses and minuses of three potential candidates to be the new Fed Chair:

"The race for the top job at the Fed thus far appears to have three runners: the incumbent, Ben Bernanke, Larry Summers, the current director of the NEC and Janet Yellen, president of the Federal Reserve Bank of San Francisco . Both Bernanke and Yellen are qualified for the job. Summers is not.

There are several reasons why Summers would be an inappropriate choice as chairman of the Fed. Let’s start with Fed-relevant knowledge and expertise. Summers is not a monetary economist or macroeconomist. He has never shown any serious interest in researching and understanding the workings of the kind of complex, interdependent dynamic systems that represent the environment a central bank operates in. He is the arch-typical quick and dirty partial equilibrium man, full of clever isolated micro-insights, but incapable of grasping the whole. His macroeconomics stalled at the Keynesian cross. As a monetary economist he has never seen a Federal Funds rate target so low he did not want it just a bit lower.....

Summers remains cognitively captured by old Wall Street and a prisoner of its culture and views....

Once the immediate crisis is over, the highest priority should be attached to designing and creating institutional arrangements and incentive structures that will minimize the likelihood and severity of future systemic crises. Summers has never shown any interest in creating institutions that enable policy makers (in the Fed, in the Treasury and in the regulatory agencies) to make credible, long-term commitments. He invariable favours opportunistic discretion over rule-bound flexibility. The last thing the US needs today is a chairman of the Fed with the long-term perspective and attention span of a fruit fly.

Janet Yellen is an outstanding monetary and macroeconomist. I have known this for a long time, because when I came to Yale as a PhD student in 1971, we all passed our Comprehensive Examinations (Comps) in macroeconomics thanks to the ‘Yellen notes’, the wonderful collection of ‘augmented’ lecture notes from James Tobin’s lectures, created by Janet Yellen as Tobin’s teaching assistant. She was a professor at Berkeley for many years, a member of the Board of Governors of the Federal Reserve System from 1994 to 1997 and chair of the President’s Council of Economic Advisors from 1997 till 1999. Her abilities as a regulator and supervisor have not, as far as I know, been tested. These are, of course, at least as important for a chairman of the Fed as his or her command of the conventional monetary policy tools. Her ability to stand up to the populists in the Congress and the relentless lobbying efforts of Wall Street and the rest of the financial establishment are also unknown. But at least we can hope.

With Ben Bernanke we know what we would get. An eminent monetary economist with a pretty good record managing interest rates, quantitative easing and credit easing from the perspective of mitigating the immediate financial crisis and the contraction that followed it; a dreadful regulator/supervisor who ‘did not see it coming’ at all; a fully-signed up contributor to the biggest explosion of moral hazard in US financial history; and the man who allowed the Fed to be turned into an off-budget, off-balance sheet subsidiary of the US Treasury.

In the field of regulation and supervision, I prefer untried and untested to tried, tested and failed."

Holy Crap! "The attention span of a fruit fly?" That was a good 'un! Maybe President O should invite Willem and Larry over for some beers and sponsor a good old fashioned hug-it-out.


Norman said...

So who do you favor for Fed Chair? Aside from Mungowitz, that is.

Angus said...

I actually favor re-appointing Bernanke

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