Aug 24

Summers or Yellen for Fed Chair: The Battle of the Chromosomes?


While many of us contemplate or are currently enjoying our summer vacation, the financial press still has a job to do.  Staring at that empty white computer screen, they must kindle our interest in an “important story” whether or not it really deserves our immediate attention.

One of the best “breaking news” stories of the summer has been the “battle of the XX versus XY chromosomes for the chair of the Federal Reserve.”

Although he has not formally stated he will be stepping down from his post as one of the most powerful people in world economics and finance, Ben Bernanke is assumed to be part of history come February when his current term ends.  Remember, there are no term limits for Fed Chairmen.  (And the record holder for time served is held by Bernanke’s predecessor, Alan Greenspan, who served over 19 years.)

But, Uncle Ben is in his second four year term, and his current boss, also in his second term, has already said on the Charlie Rose television show, “He’s already stayed a lot longer than he wanted or he was supposed to.”  I am not sure when Charlie Rose’s show became the most important platform for major Federal Reserve news, but perhaps I am spending too much time applying logic to that ‘announcement.’

However, we are talking about “breaking news” here and, though many times that title is applied to a barbeque fire in a seldom visited part of your home town, this is really big “breaking news.”

Assuming Uncle Ben is not picked for another term, the choices have apparently boiled down in the press to Janet Yellen versus Larry Summers.

Ms. Yellen, she of the XX chromosome, is currently Vice Chair of the Fed and has been since 2010.  She brings a very strong academic and government resume, including a stint running the San Francisco Fed.  Thus, if continuity is of paramount importance, one would expect her to have the inside track.

However Mr. Summers, brings his XY chromosome, and a considerable resume that includes a stint as Secretary of the Treasury from 1999 to 2001.  It was a glorious and forgetful time for the US economy, highlighted by the dot-com boom and bust.  Mr. Summers even managed to seep into popular culture during the movie, “The Social Network,” the story of how Facebook started.  In his post as president of Harvard, he seems clueless as to the value of the now ubiquitous web firm.  Boom and bust indeed.

But, let’s face it, the press needs a good back story to this ‘battle’ and thanks to Mr. Summers, they have it.  As Harvard president, he did more than not understand Facebook.  He suggested that the under-representation of women in science and engineering could be due to a “different availability of aptitude at the high end.”

So, here we have Mr. Summers known for flaunting his XY chromosome with a ‘challenger’ for Fed Chair with a XX chromosome.

But, really, does that matter?  To the press it does, because it simplifies the situation.  Even noted ‘economics expert’ and full-time former star Bette Midler has weighed in.  Truly ridiculous.

But, let’s move away from the simpletons of summer for just one moment.

Most experts realize that Bernanke did all he could in leading the Fed during the Great Recession.  However, many of those same people also say the Fed has left us in a very precarious situation, including:

– Interest rates at historical lows, much lower than they should be in order to encourage saving and investing for the long term (as exhibited in the Fed’s own Taylor Rule).

– Risk assets supported to a degree by those unusually low rates.  However, no one seems to agree to what degree.

– A shaky market for equities (and many other risk assets), when just the slightest hint of reducing bond purchases by the Fed causes a strong sell-off.

– And, those bond purchases, if continued through year end, will see the Fed’s balance sheet approach a record $4 trillion.

The latest research from inside the Fed is starting to say that ‘forward guidance’ is more important than bond purchases in boosting economic growth.  And, interestingly, that research came from Ms. Yellen’s former haunt, the San Francisco Fed.

So, picking the next Fed Chair will make a difference.  But, the selection will not hinge on the side issues noted by the press.  It will, undoubtedly, be based upon cold, political calculations (and major players are already lining up on one side or the other).  However, if the decision is to be a good one, it should be based upon deep discussions on the future course of Fed policy, including:

– Can the Fed, acting alone, really materially impact sustainable, long term economic growth?

– Is $4 trillion the new standard for the Fed’s balance sheet? (It was a bit over $1 trillion when the Great Recession started).  And, if not, how does the Fed unwind its balance sheet, without major market disruption?

– And, most importantly, what should be the ongoing tactics used by the Fed to meet its mandates of  “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”?

So, it’s time to shut out the noise of the simpletons of summer, and think carefully about this important decision…and its potential impact on investment portfolios everywhere.

“We the people” deserve answers to these and other important questions about the next Fed chair.  Alas, it is doubtful we will hear the answers.