The Bear’s Lair: Anyone but Gary Cohn for Fed Chairman!

Nearly twelve years ago, on October 24, 2005, this column reviewed the potential runners for Fed Chairman and came to the conclusion that the worst possible choice would be Ben Bernanke. Needless to say, President George W. Bush appointed Bernanke the following week. Since Donald Trump bids fair to be a considerably better President than Bush, I have some hopes that this column may not be a perfect negative indicator this time round. So, Mr. President, there are good choices and bad choices for the next Fed Chairman, but above all, avoid your National Economic Council Director Gary Cohn.

One minor but significant reason for wanting someone other than Cohn is that he would be the fourth successive Jewish Fed Chairman, and the last three (Alan Greenspan, Bernanke and Janet Yellen) have all, since the first few years of Greenspan’s tenure, been funny-money freaks. This is a long-standing historical tradition; Nathan Rothschild made a fool of himself in 1819 by strongly opposing Britain’s return to the Gold Standard. So let’s have no more of this entrenched tradition: Mr. President, it’s time for affirmative action for the other 98% of the U.S. population.

More important, given what has been wrong with U.S. monetary policy since 1995, it is very clear that the two professions you would not want to allow anywhere near the control of it are traders and real estate magnates. Traders are accustomed to operating on the shortest possible time horizons, milliseconds today when computers do it, and to benefiting from cheap money, which allows them to leverage positions more or less ad infinitum. As for real estate magnates, as Trump himself has said, they are naturally lovers of low interest rates, ideally interest rates below zero in real terms, because if real interest rates are negative, even the doziest real estate project – the ziggurat of Ba’al-Marduk in Central Park – is likely to be profitable.

A Cohn appointment, therefore, would be a trader appointed by a real estate magnate, surely the worst possible combination at a time when real interest rates have been negative for a decade, and monetary policy has been appallingly sloppy and undisciplined for more than two decades. In addition to being a trader, Cohn is the former President of Goldman Sachs, the most outrageously rewarded crony capitalist in the bailout of 2008 (the $13 billion payoffs from AIG credit default swaps via the taxpayer were particularly egregious.) Goldman also had a number of very nasty scandals in the last two decades — think Greece, Fabulous Fab and 1MDB – none of which resulted in penalties for anyone beyond middle management and Goldman’s long-suffering outside shareholders. Given the Goldman’s background and his decades as a trader, Cohn is thus uniquely unsuitable to direct monetary policy and banking regulation, the Fed’s two main responsibilities.

Unlikely though this seems at first glance, Cohn would even be a worse choice as Fed Chairman than re-appointing Janet Yellen for another four years, until January 2022. Yellen is a convinced soft-money advocate, probably more so even than Trump and Cohn, because she comes to it from conviction. She made it quite clear even back in 2007 that she favored an easier money policy than that of Ben Bernanke, and once she took over in January 2014 she kept interest rates close to zero for three additional years, when inflation was solidly positive and there was no macroeconomic reason to do so. You can argue whether Yellen or Bernanke is the squishier Fed dove, but it is clear that she is at the extreme dovish end of the Fed spectrum. She lacks the intellectual arrogance and obnoxiousness of Bernanke, but she is just as devout a believer in the magic elixir of monetary “stimulus” and zero or even negative interest rates.

However, Yellen is also a very partisan Democrat. Consciously, she suppresses this, of course. Unconsciously, she has regarded the world in a very different way since Donald Trump was elected President. To her, he is clearly unworthy to benefit from her magic beans of monetary stimulus. Hence, she withholds them. The Fed has increased interest rates three times in six months, after only one increase in the preceding eight years. It is even now planning to begin withdrawing Bernanke’s insane “QE” bloat of the Fed’s balance sheet, and start selling off long-dated Treasuries and mortgage bonds.

These policies need to go much further, pushing the Federal Funds rate up to around 4% in current markets, 2% above the inflation rate, and removing the Fed as a factor in credit allocation. That would crash the markets, begin the necessary process of wringing out all the malinvestment of the last two decades – and, combined with Trump’s de-regulation would push productivity growth back up to its historic rate of around 2.5-3% per annum. After a brief but nasty recession, we would all start getting richer again year by year, as we did before 2007. Still, Yellen’s Trump dislike will push her policies much closer to sanity than if a Democrat was in office; even more important they would make any crazed experiments in negative interest rates very unlikely indeed while Trump was President.

The peripatetic Mark Carney, who has indicated he will step down from the Bank of England in July 2018, is not Jewish, so fulfils the affirmative action requirement, but shares the Goldman Sachs background of Gary Cohn (although admittedly he wasn’t President of the place). He also did a job at the Bank of Canada that was marginally superior to Bernanke’s at the Fed. However, he has pursued zero-rate policies in Britain even though they have also killed productivity growth there, in spite of inflation being well above the infamous 2% target. He has also taken to whining about inequality, even though the policies of his coterie of funny-money central bankers are largely responsible for that inequality, through over-easy leverage and inflating asset prices. Mr. President, please don’t ask Carney to add a third central bank to his resume.

Having disposed of some thoroughly bad potential Fed chairman, we can quickly dispose of three mediocre possibilities, all of whom were associated with the ill-disciplined economic policies of one or other Bush. Greg Mankiw, Glen Hubbard and David Malpass have all indicated support for “stimulus” and low interest rates, although admittedly any one of them might prove to be better than Cohn/Yellen if appointed. Malpass is perhaps the most likely, since he is closest to Trump, but none of them would represent a clear break from current policies, which is what we need.

It is of course unrealistic to be perfectionist in these highly political matters. This column, if it had its way, would appoint Ron Paul as Fed Chairman, in order to abolish the institution and return America to the Gold Standard (which ran much better without a central bank before 1913 than with one in the 1920s.) However, back to practical politics.

We thus come to four decidedly good candidates, in ascending order of preference:

• John B. Taylor, 70. Stanford Professor of Economics. Inventor of the Taylor Rule for managing interest rates, which would please those (including myself) who would like such a rule to govern the Fed’s interest rate setting policies. Unfortunately, the Taylor Rule is far too fudgeable, including measures such as potential output, which are pretty well unknowable (and would have been set too high for the last eight years, thus setting rates too low.) He also describes himself as a neo-Keynesian, which is unattractive.
• Roger Ferguson, 66. President and CEO of TIAA-CREF, the gigantic pension fund. Vice-chairman of the Fed, 1999-2006. African-American and a Democrat, but he was nevertheless a solid sound money man while at the Fed and in response to a question from me, deplored the abolition of reporting M3 in February 2006 (M3, the broad money supply, embarrassed the funny money types by rising much too rapidly from 1995 on, showing Fed policy was far too sloppy.) A useful “bipartisan” appointment politically who would be sound on policy, with a tendency towards monetarism.
• Kevin Warsh, 47. Lecturer at Stanford Business School, Advisor to Donald Trump since December 2016. Fed Governor, 2006-11. Probably the front-runner among the “good” candidates, with a monetary approach at the hawkish side of currency policy debates, which may still not be hawkish enough. Impressive speaker with experience on the regulatory side also through the 2008 financial crisis.
• John A. Allison IV, 68, Former CEO of BB&T Bank, President of the Cato Institute, 2012-15. Strong libertarian, believer in the gold standard and opponent of the Fed. Superbly qualified and by far this column’s favorite policy-wise; he is therefore probably an outsider in the race.

Mr. President, you have the chance to be remembered as a truly great reformer in this field by appointing John Allison. Without rising to quite those heights, you can do much good by appointing Kevin Warsh or Roger Ferguson, the latter of whom would get you points for bipartisanship. John B. Taylor would also be a solid if unspectacular choice. Beyond those names, you are in the realm of the mediocre or the outright bad. If you must, reappoint Janet Yellen, though you’ll regret it in 2020. But please, please don’t land the country with Gary Cohn as Fed Chairman; on monetary policy, it has suffered enough.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)