James Pethokoukis

Politics and policy from inside Washington

Bill Clinton for Fed chairman

Jun 16, 2009 20:47 UTC

As long as we are politicizing the Federal Reserve and shredding its independence, why not Bill Clinton for Fed chairman? It’s not as loopy an idea as you might think. While the Fed chief has typically been an economist or banker, that’s not always true of central bankers in other countries. The former head of Iceland’s central bank, David Oddsson, previously served as that nation’s prime minister.

The thing is, when you look at the outlines of the Obama administration’s plan to revamp the U.S. financial regulatory system, a career politician as Fed chairman begins to kinda-sorta make sense. (Although Oddsson did turn out to be a bust.) According to an op-ed by White House economist Lawrence Summers and Treasury Secretary Timothy Geithner that generally described the plan, America’s central bank would grow in power and responsibility as it morphs into a systemic risk regulator. In addition to its continued monetary policy role, the SuperFed would supervise large and interconnected firms whose failure could threaten the stability of the financial system. (Why juice up the Fed? Since the central bank serves as a lender of last resort for the financial system, the government argues, why not give the power to help prevent problems for happening in the first place? That makes sense only if one overlooks the Fed’s so-so record as a regulator. One guess about who was supposed to be keeping tabs on Citigroup.)

Regulation by its very nature is a political act, balancing competing interests and claims from various stakeholders. (As it is, the Fed’s enlarged role during the financial crisis has drawn such lawmaker scrutiny that it is hiring its own lobbyist.) And how might those concerns mesh with the Fed’s role as an inflation fighter? The Fed already has a dual mandate — price stability and full employment — that some hawks argue serves as a policy distraction. A broader regulatory portfolio would further muck up the Fed’s mission. In another crisis, Regulator Fed might be tempted to argue for forbearance, so Monetary Fed wouldn’t have to resort to quantitative easing.

Charles Calomiris of Columbia Business School has pointed out, for example, that during the 1980s emerging market debt crisis many regulators loosened capital standards because they feared the macroeconomic impact of so many banks going bust. And what if a situation arises where what’s good for price stability is bad for the financial system?

Moreover, the White House plan would put in place a “council of regulators” to deal with systemic risk. How exactly the Fed would interact with that group is unknown, but it’s hardly a stretch to think a politician’s skill set would be helpful. And whose people skills are better than America’s 42nd president? Of course, a better choice would be to get the Fed out of the financial supervision game altogether and let it focus on monetary policy. Unfortunately, the Obama White House has gone out of its way to avoid political turf battles that would arise from a radical regulatory overhaul, which is why it is proposing so little consolidation of existing regulatory agencies. In fact, it might even be adding a new one in the form of a financial products safety commission.

There does look to be some good in the regulatory plan, particularly a push to make the originators of securitized loans keep some skin in the game. And it seems likely that at least the Office of Thrift Supervision is going to get the axe. Good ideas both. But while there may be a case for a financial regulator with systemic oversight, a SuperFed is not the answer.


Great comparison – the former chairman of Iceland’s Fed was not an economist. Perhaps you forgot that Iceland went bankrupt.

Posted by John | Report as abusive

Obama stimulus vs. Fed stimulus update …

Jun 15, 2009 13:48 UTC

A stimulus update from my guy Dan Clifton, super-analyst at Strategas Research: “Through June 5th, about $46bn of stimulus spending and $10bn of tax cuts have been enacted (total $56bn) via President Obama’s $787bn stimulus package (7.1%).”

Now let’s compare that to what the Fed’s been doing (via the WSJ):

Since the onset of the financial crisis nine months ago, the government has become the nation’s biggest mortgage lender, guaranteed nearly $3 trillion in money-market mutual-fund assets, commandeered and restructured two car companies, taken equity stakes in nearly 600 banks, lent more than $300 billion to blue-chip companies, supported the life-insurance industry and become a credit source for buyers of cars, tractors and even weapons for hunting.

The timing of the Fed exit strategy

Jun 15, 2009 13:41 UTC

When will the Federal Reserve begin to execute its exit strategy? Well, as far as the interest rate component goes, keep an eye on the job market.  At least that is how economists John Ryding and Conrad DeQuadros see things:

It is an empirical fact that since the Fed adopted interest rate targeting, it has never made the first move to hike rates after a recession until the unemployment rate had peaked. Although the funds rate target is unusually low, at 0%–¼%, it is also the case that the unemployment rate is unusually high, at 9.4%, and expected (by both ourselves and the Fed) to move higher. In the post-war era, only the 1981-82 recession has seen a higher unemployment rate than the current rate and that recession was accompanied by a rapid disinflation from 10.4% at the start of 1981 to 4.7% at the start of 1983.

Should Obama get credit for ending the recession?

Jun 3, 2009 14:07 UTC

Mustard seeds (or green shoots, if your prefer) are appearing everywhere, from credit markets to manufacturing to housing. And of course the 40 percent surge in the U.S. stock market since mid-March is hard to miss.

So here’s a question: If the American economy shifts back into growth mode this year, does Barack Obama deserve the credit? Now if you click over to Recovery.gov, you’ll see that the U.S. government has paid out roughly $37 billion in funds from the $787 billion American Recovery and Reinvestment Act. That’s not too much dough for a $14 trillion economy. And while 110 million households will eventually receive some $55 billion from the Making Work Pay tax credit, that money has only been popping up in paychecks since April 1.

Now compare the Obama fiscal stimulus to the money stimulus of the Federal Reserve. As described by Brian Wesbury and Bob Stein at First Trust Advisers: “Money supply measures are surging – in the past six months, M1 is up 25.2% at an annual rate, currency outstanding is up 15.4%, checking account balances are up 74.2%, and M2 is up 15.9%. To top this off, the Fed has … $1 trillion plan to basically print money and buy assets including treasury bonds.” Also note the language of Richard Fisher, president of the Dall Fed, in speech yesterday: “We have succeeded in pulling the economy back from the brink. We’ve come back from the abyss.”

Of course, the bigger question is whether voters in the 2010 midterm elections will view Obamanomics as a success. Let me know what the November 2010 unemployment rate is, and I will give you an answer.


My indication would be how many U.S. Republican senators are going to be vulnerable to the Obama effect, you know all that “Time for Change” stuff, we’d have to look at all the Republican senators from 2006, what were the voting results and who did they run against. My Theory would be a number of these guys would lose their seats, Democratics could easily be up to 68-69 going into 2012. The Obama effect could still be there and alot of these Senators that didn’t have to worry about the tidal wave of Democratic support could still be lingering in 2010. Where is my generations Reagan???? whimper whimper…

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Bernanke vs. Bond Market Vigilantes

May 22, 2009 17:10 UTC

Relying on the Fed cannot be the sum total of an economic policy to increase economic growth. In fact, current Fed policy may well be saving the U.S. banking system, but it is hardly setting the stage for a robust economic recovery. Scott Grannis (Calafia Beach Pundit) notices the rise in 10-year yields (bold is mine):

The Fed is trying to fight a force of nature—the bond market—and they are bound to lose. Purchasing long-maturity Treasuries, mortgage-backed securities or corporate bonds in an  to keep their yields low is a self-defeating strategy …  Ultimately, inflation and inflation expectations are what drive bond yields. If the Fed buys too many bonds, rising inflation expectations will kill the world’s demand to own bonds, and yields will rise. … So far this year, the yield on 10-year Treasuries has risen from 2.05% to 3.4%, and that is just a down payment on the eventual rise. … As politicians should know (though they refuse to believe), the economy is not something that can be easily manipulated according to their whims or preferences. As the Fed should know (but amazingly they seem to ignore this), long-term interest rates are set by market forces, not by the Fed’s Open Market Committee, whose only job is to attempt to control very short-term interest rates. Rising 10-year yields will put a floor under conforming mortgage rates, which have most likely already hit bottom. Yields on jumbo mortgages still have room to fall

Indeed, one shouldn’t mistake a healthier banking system for an economic recovery, so says David Goldman (Inner Workings bl)og, noting the price rise in commercial MBS:

Distressed assets yield enough to compensate for high losses elsewhere. The zombie strategy, in short, is working out just dandily, thank you. This means: No collapse of US national credit for the time being, and lower volatility (hedging costs) overall — but NOT economic growth.