By Gareth Brown in our one-man Vienna office
It’s a strange job, this chairman of the Federal Reserve gig. Some people (including most of the media and some in political power) seem to think of the chairman as the maestro of the entire global economy.
To those of us who know the real story—that the economy actually is, left to its own devices, a bottom up, complex adaptive system—the idea of a captain tweaking the controls is either laughable (in its impotency) or maddening (in the damage being caused).
Personally, I’d prefer to see the whole role made redundant, or at least savagely demoted. And I’d like to see the chair and much of the entire board wrestled back from the academics that have dominated it for around 25 years. That other great experiment in top down, planned economics, the Soviet Union, lasted about 70 years. So respite might take a while yet.
I was very happy when Larry Summers dropped out of the race for next chairman, mainly because I wouldn’t trust him to run my son’s $500 government-guaranteed bank account. But Janet Yellen might be no better, and may be worse. Yellen’s view of savers is scary indeed.
But life is too short to stress over things unchangeable. Let’s instead have some fun with it. Given the role of selecting the next Fed chair, who would you pick? Assume that political connections, plausibility nor desire for the job are requirements. You’ve got a pool of 7.125 billion potential candidates. Who would you give the job?
Assuming we must have a Fed chairman manipulating the price of money in the first place, then I think their most important role is to identify bubbles and lean into the wind. At the very least, they should not be inflating bubbles deliberately to achieve some short term economic and political goals.
So for me, the choice is an easy one—Jeremy Grantham of GMO LLC must be among the best in the bubble-hunting business. He spotted every bubble that Greenspan and Bernanke missed, and he won’t miss any of the ones that Yellen is likely to miss.
If you don’t read Grantham’s quarterlies, head to the GMO website and sign up (it’s free).
Do you have a better candidate?
The trouble with leaving the market to its own devices is that, while it will get to the right answer eventually, there maybe a lot of collateral damage along the way, owing to the greed and fear and speculative activity of the agents. This is what got Greenspan into trouble – he mused about whether the market should be left to its own devices and decided that it should – and see where that got us (of course he also made mistakes in implementing that policy, and now admits to them, but that’s a separate point).
As the market swings about, bubbles form and pop and people and companies go bust and have to be reformed – all this causes inefficiencies in the system, economically and in terms of human happiness (there are moral questions whether one generation should be forced to pay for the mistakes of others, and whether that will, in any case, maintain the ‘moral hazard’ for future generations). In my opinion, central bankers do have a role to smooth out these inefficiencies, as we move to the inevitable reality that our labour, investment and productivity will mean for the economy.
The truth is that over the long term, the safety of cash is a fiction. Over the long term the economy can only deliver the returns that our businesses can deliver. If they’re not taking risks and investing and increasing productivity, then the economy won’t be able to generate more money and cash won’t be able to deliver a real return, or even hold its value.
But cash is necessary for people to pay their bills in the short term, and confidence in its ability to maintain its value is crucial for this.
So the Fed and other central bankers have the impossible job of maintaining confidence in the currency in the short term, while also encouraging people not to hold cash over the long term, so that the money is instead invested.
It’s all very well to have central bankers that will increase rates and reward the holders of cash over the short term, but if cash outperforms real assets over the long term then (a) anyone with any debt (eg banks and governments) will go bust and (b) … well ultimately it can’t in any case, because the money to pay the interest has to come from somewhere as previously stated.
At the moment we’re in a bit of a hole economically. People and businesses are struggling to increase productivity and increase the returns on real assets. Therefore it seems to me that at the moment, the emphasis needs to be on getting people to get their long-term assets out of cash and into real investments, even if that might have an impact on short-term confidence in currencies and people’s desire to ‘save’.
My vote goes to Janet Yellen!