Tactics and Strategy - Does It Matter Who Becomes The Next Fed Chair?

You can pose questions like this on at least two distinct levels.  One is as a fan in the political appointments process.  I am not a fan of Larry Summers.  Indeed, I think the whole Robert Rubin crowd should be purged and a new thinking on Federal economic policy should begin. 

The other level is straight on the economics.  My starting point with that is Fiscal Policy.  It is completely screwed up.  Further, it sure looks like it will remain screwed up for the foreseeable future.  So the question here is whether changes in Monetary Policy still matter a great deal and whether somehow an effective Monetary Policy can offset a screwed up Fiscal Policy. 

Today the Times reports we're down to three candidates for the Fed Chair, but then it writes mostly about Larry Summers.  He gets a lot of endorsements from people currently inside the Obama administration who are playing an economic policy role.  I interpret that as saying he is a good crisis manager.  There was a possibility that the economy would implode entirely in 2009 and that it didn't means he did a good job.  I have my doubts about this interpretation on two points.

(1)  TARP, which was initiated under Bush II, had a component about preventing mortgage foreclosure and leaving the then "owners" remain in their homes even if the mortgages were underwater.  This is a line from the Wikipedia entry:

• $45.6 billion for homeowner foreclosure assistance. Only $4.5 billion had been spent at the time.

In other words, it was not viewed as that important to keep people in their homes.  Indeed there were many foreclosures during Obama's first term.

(2) There has still not been high level prosecution of those in the Financial Services Industry who were responsible for the crisis.  It is as if, there was some belief in the Obama administration that aggressive prosecution of this sort would be an additional drag on the economy as a opposed to a necessary purging to move forward.

Paul Krugman's column today talks about the political campaign being waged against Janet Yellen.  It is disturbing, but I think this is mainly from the fan perspective.

It seems amply clear that trickle down is not democratic in its outcomes and that economic policy for quite some time has been biased in favor of capital income over labor income.  That's what needs to be reversed and is what I'm referring to using the word Strategy in my title.   But can the Fed Chair do anything about it?

The Fed Chair might be able to do something about the following.  The credit market now appears bifurcated.   For good risks, meaning the likelihood of default is essentially nil, interest rates are still remarkably low.  So, for example, my wife and I have a 3.125% interest rate on our (15-year) mortgage.  But for bad risks, there is credit rationing.  People who live paycheck to paycheck can't get credit at all or are charged usurious rates for borrowing.  If you think of access to credit as an adjunct of income, then this bifurcation in the credit market is like a further tax on labor income.

Similarly, start up businesses may have limited access to credit.  This is something Joe Nocera was arguing big time a couple of years ago.  Perhaps the situation is a little better now, though I suspect it still needs some fixing.  Though not insignificant, it is small bore in my view.  For the large bore stuff, Fiscal Policy is needed.

Let's turn to tactics.  Presumably this matters most if another crisis is looming.  Then a response needs to be determined, quickly.  If there is a fire you need firemen to put it out.  Much of the Times piece I linked to above gives high marks to Summers because he's been through a crisis before.  The Asian Debt Crisis happened under his watch while Secretary of Treasury.  But might not the next crisis demand a quite different response?

There seems to be some sentiment that the next crisis will be China, if it isn't happening already.  If so, and if the Chinese try to prop up their economy via the usual policy tools, then there may be some role to play by the Fed in facilitating this - buying back U.S. Debt that China currently holds and/or buying new Debt that China issues.  In effect, the Fed may de facto become the Central Bank for a good chunk of the planet, at least on a temporary basis till the crisis is averted.

For the Fed Chair to matter you'd have to believe that these issues would be handled substantially differently, depending on who gets the job.

As a fan I'd like to see Yellen get the pick.  As a purely analytical matter, however, I suspect it matters not much at all.