Talk of the new Fed chair's identity is really starting to heat up. Janet Yellen has been in the running for a long time, but now Larry Summers has recently emerged as a top contender.
If you are an interest rate hawk, then the possibility of Summers should excite you because he's probably the guy who'd raise rates quicker than Yellen. Yellen is widely considered an inflation dove.
I am bothered that Summers is in the mix. He's been a disaster when it comes to economic policy. When he was in the Clinton administration, he supported the repeal of Glass-Steagall, along with the deregulation of the financial industry and the proliferation of derivatives. He was a member of the Robert Rubin, Alan Greenspan, Larry Summers triumvirate that can be directly tied to the recent financial crisis. It was their policies that set the conditions for the destruction we've witnessed.
Summers was one of the individuals in 1998 (along with Rubin, Greenspan and Arthur Levitt of the Securities and Exchange Commission), who opposed the Commodity Futures Trading Commission's position on swaps regulation. This was the famous "warning" given by Brooksley Born, who was the CFTC's chairperson at the time. She spoke about the lack of transparency and the highly-speculative nature of these instruments. She emphasized that they were outside of any regulatory oversight, making them potential time bombs.
It's hard to believe but the Rubin-led group's challenge to Born came despite the fact there had already been a crisis requiring a massive bailout by the Fed. That crisis was the failure of Long Term Capital Management, whose collapse nearly brought down the entire financial system. This was a prelude of what was to come, yet Brooksley Born resigned her chairmanship in 1999 under pressure from Summers and the others.
Given that incident, and his track record during the recent financial crisis in which he argued for a smaller stimulus, it's mind-boggling to me that Obama would want this guy to run the Fed. Maybe Obama's own comments can explain. Here, have a look:
"...when unemployment is still too high, and long-term unemployment is still too high, and there's still weak demand in a lot of industries, I want a Fed chairman that can step back and look at that objectively and say, let's make sure that we're growing the economy, but let's also keep an eye on inflation, and if it starts heating up, if the markets start frothing up, let's make sure that we're not creating new bubbles." ¿Barack Obama
This is the crux of the problem. The president believes the Fed controls the economy. He also believes that the Fed creates bubbles. He's seemingly at a loss to see that it is his job, along with Congress, to promote growth and to ensure full employment through fiscal policy.
If you cede total control of your economy to some other entity, then that entity better have the power to do something; the Fed surely doesn't as we have seen. There's very little, if anything, the Fed can do other than set interest rates and it's arguable whether that even has any impact.
When I bought my house back in 1985, my mortgage had an interest rate of 11.75%. Guess what? I still bought. In fact, lots of people bought. We had a booming economy, yet rates were high. Fast forward to now: We have a weak economy with rates at historic lows.
It's therefore hard to make a case that rates have any effect. The only thing you can really say about rate adjustments is that they shift income around -- savers to borrowers, borrowers to savers, etc. That's it. In the aggregate, no new income or assets are added.
It's sad that the president doesn't understand this, but it is worse that he would consider a guy who's been such a disaster. It's not that I'm worried the Fed will do a whole lot of harm; I'm more worried about the fact that so many people believe the Fed can cause trouble. As we all know, that belief is a function of who's sitting in the chairman's seat.