Summer's End: Obama Inadvertently Buries His Man
Thursday, 01 Aug 2013 04:48 PM
Wall Street believes the Fed will taper in September. My thought is that tapering is likely to come in December, or perhaps not until the New Year. (More on that logic in a moment.)
The other big Fed event occurred when President Barack Obama gave a strong defense of his former top economic adviser, Larry Summers. In front of a full caucus of House Democrats, Obama offered a full-throated rebuttal to the attacks of left-wing and feminist groups who have been coalescing around current Fed vice chair Janet Yellen. Obama told the Democrats “not to believe everything you read in the Huffington Post.”
Of course, with Ben Bernanke’s term ending in January, this all about the debate over a successor to the Fed chair. It’s a timely topic. But here’s the problem for Mr. Summers: Even though Obama has yet to make a choice on the matter, the president’s strong defense of Summers reduces the likelihood that Summers will be appointed. Why? Because Summers now looks like Obama’s man, even if the president hasn’t yet said so.
Consider this: If Summers looks like Obama’s guy at the Fed, what does that do to the all-important principle of Federal Reserve independence? Remember Arthur Burns? Dick Nixon’s guy at the Fed way back in the early 1970s? What a catastrophic inflationist period that turned out to be as Burns pumped money into the economy in order to get Nixon re-elected. Nobody wants to repeat that. And that’s why Obama basically terminated a Summers nomination when he went to bat for him on the Hill. When it comes to appointing Fed heads, I’ve never seen anything like it.
Now, I’m not weeping about any of this. Janet Yellen and Larry Summers, two very smart people, are nonetheless Keynesian fine-tuners when it comes to monetary policy. And we’ve all had enough fine-tuning from Ben Bernanke. It’s probably not going to follow from a Fed nomination by a Democrat president, but what U.S. monetary policy really requires is a clear set of rules to stop the ad hoc, pillar-to-post nature of Federal Reserve operations.
Maybe Bernanke will turn out to be right. Maybe he’ll go down in history as our economic savior. But in the long run, whether it’s a dollar backed by gold and commodities, or a nominal GDP target, or the John Taylor rule, confidence in the U.S. dollar and economy will be greatly enhanced if monetary policy is guided by a clear set of rules. Neither Yellen nor Summers will provide that.
Turning back to the issue of Fed tapering (or tightening), I think the central bank is going to take its time. Indeed, the economic trends suggest there should be no rush to end quantitative easing. Like many conservatives, I didn’t like QE in the first place. But we’re stuck with it. And the trick now is to get out of it without inflicting more economic damage. My suggestion is simply this: Go slowly.
The Fed policy committee made no mention of tapering in its published directive this week. And the recent economic trends show an extremely weak recovery. Over the past year, real GDP has grown by only 1.4 percent, with inflation at 1.5 percent, according to revised GDP reports. Nominal GDP growing at only 2.9 percent is virtually a post-WWII low. It’s a rate that’s more appropriate for recessions than recoveries.
And the Fed itself slightly downgraded the economy this week. It also noted that inflation is below target and is worried that the recent rise in long-term interest rates has damaged the recovery in housing and auto sales.
Yes, there has been better news on the jobs front. But business capital equipment investing, which is the heart of job creation and growth, remains anemic. The 2013 spending-cut sequester has not produced economic catastrophe, but the economy is facing substantial tax increases on upper-end earners and investors. That’s a big headwind.
So let us hope the second half of 2013 produces better growth than the first half, as many economists predict. But until that evidence comes in, let’s also hope the Fed holds its fire and leaves the tapering idea alone.
Then perhaps Mr. Obama will consider a Fed candidate who understands the importance of policy rules and consistency for a strong King Dollar and a much more confidant recovery.
What rule does this guy want? A premature King Dollar is not the answer. Contrary to Mr. Root and others who have been predicting runaway inflation for years, Krugman has been proven correct for years that there won't be any significant inflation until the economy does better. If you listen closely to Bernanke when he is talking to Congress, his benchmark rule is that there will not be much tapering until unemployment gets to 6.5% and/or inflation gets above his targeted 2%. If anybody knew when that will happen, you'd know when the stock market will turn south.
ReplyDelete--David