Friday, August 2, 2013

Why the Three Front Runners for Fed Chair Should Be Rejected

Bill Bonner writes:

Janet Yellen has three things going for her. According to Alan Blinder’s recent piece in The Wall Street Journal, she (1) is a woman, 2) is a good diplomat and (3) has been around the Fed since 1990 and nothing bad has happened.

We offer a trio of replies. (1) There are roughly 120 million adult women in the US; womanhood is not a qualification for the job. (2) Diplomacy is irrelevant. (3) Having been around since 1990 is a disqualifier. Yellen was at the Fed as US total debt rose from about 230% of GDP to over 350%. If she had had her wits about her, she would have realized that the Fed was enabling a huge credit bubble that would one day burst. Yellen should be passed over.

The Insider

This third argument also disqualifies Don Kohn, a Fed insider for the last 40 years. The Washington Post describes Kohn as “the consummate Fed veteran” and Alan Greenspan’s “right-hand man.”

Well, that pretty much eliminates him. When Alan Greenspan took over as Fed chairman, the US had a statutory debt limit of $2.8 trillion. Today, there is $16.8 trillion of US government debt – much of it accumulated during the 19 years while Alan Greenspan was in the chairman’s seat, with Don Kohn on his right side.

When Greenspan took his post at the Fed a total of about $250 billion of US debt was in foreign hands; today it is $5.6 trillion. Greenspan, with Kohn as his sidekick, blew up the debt that later blew up the US economy.

Then, after Greenspan left the Fed in 2006, Kohn kept at it. From The Washington Post: “He was Bernanke’s No. 2 during the financial crisis.” As his oft-repeated public comments make clear, Greenspan had no idea what was going on. Evidently, neither did Kohn.

The Washington Post also says he has “credentials as a crisis manager.” But the Fed reacted to the crisis like a crowd in a nightclub fire: It panicked.

Instead of allowing a credit crisis to smoke out the weakest debtors, it rushed in to save them all – offering them all more debt on better terms. Bankers who had made the biggest errors were left unpunished. Instead, they were rewarded with lower, Fed-guaranteed borrowing rates.
“You boys got yourself into a little trouble,” said the Fed cop on the beat. “But here’s a new Corvette… and a bottle of Jim Beam. Go have a good time.”

The Genius

As to Larry Summers, what can we say that isn’t already public record? That he blew up Harvard’s endowment is well documented. That he is “brilliant” is also beyond dispute. But that is the problem. Even Summers believes it.

“Brilliance” is defined in a description of Summers that also appears in The Washington Post:
You can bring him up to speed on anything in 15 minutes. And if you can be interesting enough to keep his attention for half an hour, he will start throwing out hypotheses and what-ifs and suggesting connections you would never have thought of.
The brilliant man has a brain that spots “connections.” These lead to “hypotheses” – visions of the future as it might be. As he becomes more brilliant, even God himself is dazzled. But in contrast to the deity, Summers is at an existential disadvantage: He has no idea what will happen next.

The wise man has an advantage over the brilliant man. Socrates himself pointed it out. Brilliant men think they know something. Socrates knew his limitations. He knew he know nothing.
Larry Summers is no Socrates…

This above article originally appeared at

Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

You can subscribe to his free daily e-letter, Diary of a Rogue Economist, here. 


  1. Billbonnersdiary is one of my favorite sites. It's been down for weeks!

  2. Janet Yellen is apparently a Minsky-ite.

    Minsky-ites kinda/sorta note that "private" funny money loans result in bubbles, but they are resolute in suppressing and ignoring how these loans distort and impair economic calculation. Therefore, the fault for bubbles does not lie with the government intervention and funny money system. Instead, the fault lies with the silly and irrational investors who must be saved by the omniscient and benevolent bureaucrats.

    If the economy is indeed going to go down the drain in the next few years, I'd prefer a leftie Minsky-ite at the helm of the Fed so we can blame it all on interventionism as opposed to an alleged Republican-appointed "conservative".

  3. I agree with Bonner, but I'd go further. We not only don't want some brilliant intellect that is going to tweak an interest rate to be JUST right, a la Goldilocks. We need to understand that the Fed itself is inherently destructive to our ends.

    The Fed is not an inflation-fighter. The Fed is solely responsible for inflation. Worse, it is now targeting 2% inflation based on a metric which is itself doctored to produce a desired number, not one that accurately reflects real world conditions.

    The Fed, much like the government, lies about everything it's doing. It must do so to maintain the illusion that it is somehow steering the economy, when in fact it is the largest counterfeiting operation in world history. No more coin-clipping for this gang of thieves. A few key strokes is all it takes.

    And now that the entire developed world is on this insanely stupid fiat currency experiment, we're going to discover what happens when the world's economies jump off the cliff together. The impact is going to be catastrophic and the outcome will leave billions destitute.