Summers at the Fed: A Final Note

I suppose there is nothing staler than yesterday's Fed nominee, but I somehow feel constrained to add a followup to the superplus excess of stories about the virtues and defects of Larry Summers—and an invidious comparison to the present Fed chair, Ben Bernanke.

Here's the thing: the one thing everybody seems to agree on re Summers, friend and foe alike: he's b-r-r-r-illiant, with the particular capacity for coming into a room and just blowing everybody away with his success at mastering his brief (counting “foes,” I exclude people like Rick Perry who simply do not give a damn what they say).

I have no basis on which to quarrel with b-r-r-r-illiant, and I actually liked the little bits of authentic Summers scholarship that I've run across (I even liked the one about exporting pollution costs). But could it to be that Summers' ultimate purpose in life is to blow people away, and that he cares far less about what he says—or even what he achieves—than he does about his success in leaving people gobsmacked by his knack for saying it?

Which brings us to Bernanke. I'm not going to venture a judgment on whether Bernanke is as brilliant as Summers (though I bet Summers would). But the personal traits use to identify him seem almost the opposite of Summers': his modesty, his courtesy, his disposition not to make himself the center of attention. Sometimes in the work of journalists, this can come close to Stockholm syndrome: the reporters who know him best seem almost constrained to write about how the world at large just doesn't understand what a good job Bernanke is doing.

Actually, I'd agree that he has done a good job: probably as good a job as anybody could have been in these perilous times. But he's made his blunders (Not Seeing it Coming certainly counts for a lot).  If he is a success, he is at best a success on balance--but that may be the best we have any right to expect.  At any rate, my immediate point is that insofar as he has accomplished anything, those traits of personal character have a lot to do with it—that it's more than merely cosmetic, that the very qualities that win the hearts of reporters are qualities that make him so effective in his job. If nothing else, the very idea of a Fed chief who is not Full of Himself, must alone be enough to leave his adversaries wrong-footed. Now, is there any other candidate with that sort of personality?

Who Cares about the Dual Mandate?

Scott Sumner waxes splenetic about an (im)pending measure to end the Fed's dual mandate--to scrub the Fed's responsibility for promoting employment, leaving it only with the job of stabilizing money.    But it's a looking-glass war on both sides.  
 
Let's stipulate for starters that the dual mandate never did make any sense.  Stabilizing money and maintaining employment are jobs independent of, and often at odds with, each other. Mediating between them isn't "science," neither economic nor rocket.  It's an essentially political exercise in trading off competing interests best left to the political class.

On the other hand, when has the Fed ever taken its dual role seriously?   The guys in the suits know that their job is to manage  money. They'll pretend to worry about employment if as and when necessary to placate a Congressional overlord.  But the incumbent overlords aren't all that worried employment anyway (possible exception: the overlords very likely do like the idea of a workforce that is hungry, insecure and thus dependent on its betters).  So, why waste time and energy over a non-issue?   My own guess is that it's symbolic or cosmetic--trying to please some big donors somewhere who think it really matters.


On the other hand, why waste time and energy fighting it?  Again, there may be cosmetic reasons--perhaps also tactical if it gives you a chance to embarrass your adversary.  But the content is pretty empty.

Scott's rhetorical trope also seems hasty or ill-judged: "turning macro policy over to a cabal of unelected bankers."  Um--?   Scott also says that the sponsors have "pissed off unemployed Youngstown steelworkers"--but before we sign onto that one, I suspect we might want to find an unemployed steelworker and ask him.

So, should we let them get away with it, i.e., end the dual mandate?  Surprising myself a bit, I guess I say "maybe not."   I sign on with those who think there is precious little a government can do about the economy anyway.  But there probably is some virtue in keeping the heat on.  If the Fed doesn't have the mandate to care about employment, then I suspect nobody gets the mandate to care about employment. And paltry as that obligation may be, there may be some residual (again symbolic, tactical?) value in making the guys in suits at least pretend they have to care.  So I suppose I am saying Scott is right after all.

Somebody Help Me Understand the Dual Mandate

For as long as I have known anything about it, I've entertained an untutored sense that  the "dual mandate" must be a bad idea.  That is: the  Federal Reserve is suppose to guarantee financial stability.  No wait, the Fed (since 1977) is also supposed to promote full employment.

But these two are naturally at war with each other.  In some cases (I am told), the best way to juice up employment is to promote a bit of inflation--in short, to destabilize.  It may the right thing to do, but these two are essentially political changes that shouldn't be made by a bunch of technocrats.

So I paid attention when I saw that Sen. Bob Corker and Rep. Mike Pence are calling for an end to the dual mandate--want to trim the Fed down to the job of stability only.

In the context, it is natural to suppose that this new impulse towards breaking the dual mandate must be some sort of vile Republican plot and it may well be.  But what kind of a vile plot?  Or more precisely, just exactly how does it play out on the ground?  Does the dual mandate make  inflation (deflation) more (less) likely?  And who cares?

Examples: I lived through a kind of "inflation golden age"--the 60s and 70s--when folks like me bought our houses at $20-$30k and watched the value inflate while we paid off our mortgages in little teeny deflated dollars.  Yet I understand that a brisk dose of inflation may help jump-start a sluggish economy because it effectively reduces sticky wages.

So, should we think of the inflation lobby as a bunch of carefree debtors who want to inflate away their obligations?  Or a bunch of grasping capitalists who want to impoverish the honest working man (if there be such any more)?

Another way of approaching the point.  Consider the Tea Partiers, who put the new lot into power.  Let's grant that they have an almost uncanny knack for embracing candidates fatal to their own best interests (end unemployment insurance, deregulate the banks again, and god forbid you should have health care). Exactly what is their interest in this little whirlpool?   I'm almost ready to take it as an article of faith that if Corker and Pence are for it, then it will end up doing harm to the TPs in the end.  But exactly how?

I'm not an economist and I don't even play one on TV.  Anybody?  Anybody?

The Fortunes of the Fed

Joel is intrigued by the financial disclosure form of Janet Yellen, the incoming Federal Reserve Board Vice-Chair, though I am not certain whether he is more impressed by the fact that she may be worth $8.5 million than that Chairman Ben Bernanke may be worth less than a million (link).

The Bernanke number is interesting, though he may be part of a great tradition. By my recollection Paul Volcker, the Uber-Fed, was not remotely wealthy until, at least, he left the chairmanship. Nor, I think, Ben Strong, the architect of the Federal Reserve system: as I recall, his prospective father-in-law was scandalized that his daughter ws marrying a mere government clerk (he was President of the New York Fed). Some guys just seem to have a thing for sound money.

Re Yellen, three things. One, I bet her balance sheet does not include the discounted present value of her University of California pension--considering that she is reporting jointly with her husband, another famous UC Berkeley econ prof, that is worth another $2-4 millon easy. Second, I wonder whether it catches all her discretionary tax-deferred pension funds--403(b)s and such. From Bloomberg I get the impression that maybe it does, and I should hope so. Humble English professors at Poduink U can easily have a couple of mill in their TIAA-Cref if their lives are sufficiently prudent or boring, and I suspect she could have done no less well. But third, the number apparently does not include her primary residence, which, given that she is at Berkeley, is probably worth a fair chunk of change.

Bloomberg adds a neat bit of context:

The number of U.S. households with a net worth of at least $1 million, excluding primary residences, increased 16 percent to 7.8 million last year after a 27 percent drop in 2008, according to the Spectrem Group, a Chicago-based consultant. The median U.S. family’s net worth was about $120,000 in 2007, according to a triennial Fed survey.

I should add that I am not particularly scandalized that all members of the Fed are millionaires. Considering that their primary job is to preserve the integrity of the money supply, I'm glad they all have skin in the game (I am intrigued that they seem to have a taste for inflation-protected securities--should that be telling us something?). Indeed, the real concern may be that as millionaires go, they are all pretty minor league.

Understatement of the Day

We “did not perform flawlessly.”

--Fed Vice Chairman Donald Kohn, assessing performance of
The Federal Reserve Board during the housing bubble

Afterthought: Sen. Richard Shelby asked him if he thought the Fed had been afraid of the banks. Kohn said no, and if you believe Benjamin Friedman (link), Kohn is right: apparently the Fed did not act because Alan Greenspan believed, as a matter of principle, that it should not act.

Link: WSJ via this site (link) (Journal is $$$).

Now, Don't Worry About a Thing, Dear...

Underbelly's magnolia bureau is a nervous Nellie. She's reading about Federal Reserve Board Governor Susan Bies who is telling people that we shouldn't worry about a mortgage collapse becasuse it's only a matter of (Ms. Bies' words) “7 to 8 percent of all outstanding mortgages”--i.e., the subprime ARMs. "A sliver," says Ms. Bies. (link).

"Who is she kidding? " snarls the magnolia bureau.

Well, let's do the computation here. Take my class of 25 debtor-creditor students, getting ready for a pop quiz. Tell them: by the way, a block of blue ice is going to drop the the skylight here and set two of you down flatter than an amateur Brunhylde. Would this little tidbit catch their attention? Hm, let me think...

Fn: Evidently she's going home.