Who Should Replace Ben Bernanke and Timothy Geithner?

Andrew Ross Sorkin posted this intriguing piece at Dealbook yesterday regarding the two most important job vacancies in the USA.  Timothy Geithner is out as Treasury Secretary this year and it’s rumored that Ben Bernanke doesn’t want to stick around following 2013.  That means there are some huge decisions to be made in the next 12 months.

Who Is Qualified to Run the Fed?

This is a very difficult job to fill.  Fed Chair is essentially the most important banker in the world.  So it has always baffled me how so many Fed Chiefs end up running the Fed despite virtually no banking experience.  But perhaps I am being too demanding.  After all, banking is really just a business of risk management so anyone with a very solid background in finance, economics and risk management should fill the role rather well.  Who has proven time and time again that they not only understand the economic machine far better than most others while proving to be a superior manager of economic risks?

I would nominate Robert Shiller of Yale University.  Shiller isn’t in the Monetary Realism paradigm completely, but he’s not far off either as far as most mainstream economists go.  But more importantly, Shiller has proven an exceptionally good manager of economic risks.  After all, he predicted the two biggest US bubbles of the last 75 years (the Nasdaq bubble and the housing bubble).  He has an acute understanding of human psychology and how the market place relates to the macroeconomy.   Being the Fed chief is, in large part, about managing economic risks and knowing when certain policies could create imbalances or destabilize the economy in dangerous ways.  In my opinion, Shiller is the perfect blend of someone who can be quickly confirmed, has the credentials, the experience and the proven track record to run the FOMC.  I doubt he’d want to, but if I were President I’d fly to Yale yesterday and tell him that his country needs him sorely.

Who is Qualified to Run the Treasury?  

I was originally going to nominate two people here, but I don’t think that’s necessary.  I would nominate Professor James Galbraith of the University of Texas.  Like his father, professor Galbraith has proven that his understanding of the macroeconomy is superior to most other mainstream economists.  He has consistently identified the problems plaging the nation during this financial crisis and correctly identified the weakness of monetary policy in the early stages.  Plus, anyone who can fit this line – “I come to bury Milton, not to praise him” – into a speech on the economy needs to be in charge of something in our government full of weak spined people who get overrun by banking lobbyists left and right.  Galbraith is sympathetic to MMT and in my email communications with him he has expressed a sympathetic view of Monetary Realism.  Like me, he has rejected MMT’s Job Guarantee as being a potentially inefficient approach to government spending, but has proven that his core understanding of the monetary machine is far superior to most neoclassical economists.  Most importantly, Galbraith understands government budgeting.  He understands that the US Treasury isn’t “running out of money” and that the true constraint for the nation is inflation.  Who better to run the Treasury than a guy who actually understands how the nation’s finances work?

What do you think?

 

 

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Honestly think I’d have a hard time coming up with better choices than those two. But I’ll throw Warren Mosler, Robert Reich and William K. Black into the mix as well.

    • Mosler’s proposals are too dramatic. Cutting the Fed Funds Rate to 0% permanently would never be accepted. He wouldn’t get past confirmation. Reich is way too liberal. Again, he can’t get confirmed. And Black hates modern banking. The Fed is supposed to support the banks. Not annihilate them as Black wants to do.

      • I don’t agree that Bill Black wants to “annihilate” the banks, or that he “hates modern banking” unless by modern you mean post-1998. He does state (over and over again) that a once sentence law should have been passed in 2009 instead of the 2000 page monstrosity he refers to as the “Legal Profession Full Employment Act” and the rest of us call Dodd-Frank. Black says that instead of Dodd-Frank, a one sentence law which states the following:

        “This law hereby repeals the 1999 Financial Services Modernization Act [which got rid of Glass-Steagall] and the Commodity Futures Modernization Act of 2000 [which ensured derivatives remained unregulated]” should have been passed in 2009.

        Personally I’d throw in the Bankruptcy Reform Act of 2005. Chris Whalen points out that the banks “got everything they wanted” in that bill, and perhaps Black would agree that it ought to go as well.

        So overall, those sound like EXCELLENT proposals to me! It’s funny, that the Canadian banks bitched and moaned with the same song and dance our banks did… that they NEEDED those laws to keep from being a financial backwater… they needed to be able to compete with “modern banks!” The difference was that the Canadian government said “NO!” … and Canada was one of the only developed nations in the North Atlantic NOT to undergo a financial crisis in 2008/2009.

        So if we rewind the laws to their pre-1999 status (and that’s now called “non-modern banking”) I’m ALL FOR IT (and I think you could find a LOT of other people for it too… including now (of all people) Sandy Weill!!!!

    • William Black would be great as the U.S. Attorney General, but the Fascist Bankers who control our political system would NEVER allow it.

    • Wow, I’m impressed that someone in gov actually almost gets MR or MMT.

      New book by Frank Newman (deputy of Treasury under Clinton–maybe Hilary really would have been a much better president that Obama if she chose Newman instead of Geithner)
      is “as close to MMT as it gets”

      from the link (I’m posting an excerpt because web traffic statistics studies show that less 2% to 5% click links –and by adding an excerpt, you can get it up to 5% to 8% click-thru rate)

      The six myths that New writes about:

      “Asian nations are bankrolling the U. S.”

      “Treasury issued securities crowd out the private sector”

      “If everyone tries to save more, the nation will save more, and
      investment, GDP, and employment will increase ”

      “If the government reduces the deficit, then national saving and investment will increase ”

      “Today’s deficits create great burdens of tax for our children ”

      “If the U.S. does not get its deficit reduced soon, treasuries will face the same problems as Greece and Ireland”

      Frank N. Newman, “Six Myths that Hold Back America: And What America Can Learn from the Growth of China’s Economy,”
      Diversion Publishing (December 6, 2011)
      (h/t Salsabob in the comments)

      Wikipedia:

      Frank N. Newman was born in Quincy, Massachusetts on April 20, 1942.[1] He was educated at Harvard College, receiving a B.A. in Economics in 1963.[2]

      Newman joined Peat Marwick Mitchell & Company in 1966 as a manager.[3]

      In 1969, he moved to Citicorp as a Vice President.[4]

      He joined Wells Fargo in 1973, and worked there as a Vice President from 1973 to 1980, and then as an Executive Vice President and as Chief Financial Officer from 1980 to 1986.[5]

      He then moved to BankAmerica Corporation where he was ultimately Vice Chairman and Chief Financial Officer until his departure in 1993.[6

      In 1993, President of the United States Bill Clinton nominated Newman to be Under Secretary of the Treasury for Domestic Finance.[7] The next year, he became United States Deputy Secretary of the Treasury, holding that office until 1995.[8]

      Newman then returned to the private sector, become Vice Chairman of Bankers Trust and then serving as President and Chief Executive Officer of Bankers Trust from 1996 to 1999.[9] In 2005, he became CEO of Shenzhen Development Bank.[10]

  2. Good picks. Not sure Shiller is totally qualified for Fed Chair though. Does he really have the banking background?

  3. Nice picks.

    I personally would hate the 3 Romney options if he wins (Mankiw, Hubbard, Taylor)

    Summers would be OK. As would be Yellen (not sure how she views monetary policy but I would assume it would be close to Bernanke’s).

    I personally like Bernanke but its becoming obvious he won’t be in past 2014.

    • Summers is okay? He was Treasury Secretary when Clinton helped de-regulate the banks. He made many of the proposals in fact. He’s been in the pockets of the big banks since day one. That guy isn’t qualified to run a lemonade stand if it’s within 100 miles of a bank.

      • I don’t know that much about him (Summers) except for some propaganda (propaganda I happen to be sympathetic to). Bill Black (ex-regulator/prosecutor during S&L meltdown) does not have much nice to say about him. He helped push for the Glass-Steagall repeal and the 2000 law making derivatives un-regulated. If you’ve ever seen the Frontline documentary about how Robert Rubin (Clinton’s Treas Sec.), Greenspan, and Summers shut down Brooksly Borne and her attempt to regulate derivates, it’s pretty damning. And finally, there’s the 2005 Kansas City Fed symposium put together to celebrate the Greenspan’s stewardship of the Fed (which was coming to a close). All the neo-classical big wigs were there except Milton Friedman. Everybody was very upbeat, and presented papers along those lines celebrating the “Great Moderation” under Greenspan (something which Friedman wrote an article about praising the next year, 2006, in the WSJ). All praise, except for one guy: Raghuram Rajan… a Chicago School neo-classical for sure, but he presented a paper stating “Perhaps all these new financial instruments [derivatives, etc.] are making the world riskier!]. You can read the whole transcript at the KC Fed site. What stood out for me was the way Summers jumped down Rajan’s throat about it! He actually called Rajan a “Luditte” and his paper “misguided.” Of course Rajan was RIGHT!!!

        In Summers defense, I read somewhere that he and Geithner had some pretty big fights in the early days of the Obama administration: Summers thought that at least SOME of the banks and bankers should be made an example of for the financial meltdown (Sheila Baire agreed, especially regarding Citicorp), but Geithner fought tooth and nail for the banks, and eventually brought Obama over to his way of thinking… the result? As Bill Black states, a scandal 70x bigger than the S&L crisis (and nearly identical in details), but for which almost NO indictments were handed down to the big players (in contrast to the 30,000 criminal referrals handed out to some 3000 people resulting in a 90% conviction rate, like what happened after the S&L crisis).

        • BTW, Bill says the danger to the public in avoiding prosecution is what he refers to as “Gresham’s Law” which was a 16th century “economist” who proposed that “bad money drives good money from the marketplace.” He was referring to debased gold coins, but George Akerlof and Paul Romer picked up that theme in their description of what happened during the S&L crisis (expanding on George’s evaluation of used car “Lemon Markets” in the early 1970s): “Looting: The Economic Underworld of Bankruptcy for Profit” wherein they examine how dishonest behavior drives honest players from the market.

  4. Cullen, what about Jan Hatzius? Hasn’t he done some nice work on Godley and other heterodox stuff? He’s about as close to being in paradigm and in banking as it gets.

  5. Paul Krugman, anybody? Hey, just kidding! :)

    I agree completely with your proposals. Shiller and Galbraith would be my top choices as well. Unfortunately, they won’t be the top choices of whoever will be POTUS.

    • I’d almost switch them around. Galbraith for Fed, Shiller for Treasury. Fed has a way more vocal position and from what I’ve read Galbraith really knows banking. Not that Shiller doesn’t (I have no idea) but he’s much more known for his work in markets, etc. I’d be happy with either of them in either position, though.

      • Though to be fair he’d probably make more sense among the economic advisors

  6. my vote would go to Bullard. he´s the voice of reason amongst the majority of doves.

    as i stated in previous discussions – an open support for MMR by a fed chairman would immediately lead to the theories only constraint – inflation.

    imo inflation rates around the middle of next year will decide who gets the job. at 3% or above a uber-dove like Yellen is out of the picture.

    i would add another point. imo the reason for yesterdays selloff was the Bernanke story.
    it started way before those bad earnings came out, just around the time the NYT story made the rounds.
    bad earnings were expected. and the market never worried about DD or UPS in such a big way.
    CNBCs Liesman tried to play it down, that it would be an open rumor. but his face looked concerned.

    the thing is that with retirement in early 2014, Bernanke could end up a lame duck in the middle of the next year. extended ZIRP or more QEnfinity could be in jeopardy.
    the market seems concerned that he will be replaced by a hawk or at least a less dovish person. there WILL be heated public debates regardless who runs the white house.

  7. A move away from Academia will probably happen. The next President is going to want more of a Greenspan type who is hard to decipher. Bernanke is a 2 speaking and Shiller isn’t much better, without QE and large deficit spending I think the market would have fallen hard during his tenure. The next central banker is going to have to reassure us through a downturn and slow world growth along with less spending out of Congress. A better question is who on Earth wants this job?

  8. just looking at the headilne i thought “shiller for fed!”. that we’ll be the unorthodox choice that can make a difference.

  9. We need to go outside the banking system. Can’t remember who said it, but ‘Banking is far too important to be left to the bankers.’
    We need civilian control of the financial system. Otherwise we will continue to have a system that puts the interests of the bankers first.

    • You realize Bernanke was an academic before he moved over to the Fed…?

      • An Ivy League academic, that’s pretty much the ultimate insider — we have too many of those running the country.
        Can’t we find a talented CEO with executive and leadership skills? Somebody to look at the situation with fresh eyes and rally opinion around a new paradim.

        • You know we all here merely reply to the words you put down in the comments: “We need to go outside the banking system.” Making the leap from Ivy League academic to being inside the banking system is a big one.

          Just pulling in a CEO with no banking experience is like asking an NBA head coach to take over for an NFL one. It’s apples to oranges.

          • An economic professor from Princeton — that’s the definition of a banking/financial insider.

            What about somebody like Leon Panetta — Secretary of Defense without previous military hitory. Or Earl Warren, Supreme Court chief justice without having been a judge. It was perhaps because he was not a judge that Warren was able to shape the Supreme court and take it a different direction.
            American society is hurt by excessive specialization, imo.

          • Poor analogy, in my opinion. Successful tenures are a byproduct of leadership, not expertise. John Wooden would have been an excellent football coach, Bill Belicheck and Mike McCarthy would be excellent basketball coaches. The best “coach” I ever had was actually a high school band director.

            No top exec is ever expert in all facets of the organization he leads, none, ever…..despite what some top execs may think….which is part of the reason they are poor leaders and end up failing!

            Our country has a severe shortage of leadership skill in critical govt positions. It might be time to begin making leadership THE primary requirement when searching for replacements….fed, treasury, and president….. seem like good places to start.

            The best leaders will rarely come from among lifetime academics, and usually come from other positions of leadership and accountability…. military leaders, business ceos, governors, large city mayors, etc. There’s a reason…think about the personal accountability traits of people who pursue positions in each place. Academics, as well as members of the senate and house, are rarely held accountable for anything they say or do….they are members of debating societies, not problem solving, and accountable, decision makers. They become masters of the unprovable claim, like….”3 million jobs created or saved”, or…..”it would have worked if we had just done more of it”, or….”things would be a lot worse if we hadn’t done it”. You will always be able to find the rare exception, like Lincoln. But in my view the many more Washingtons, Roosevelts (both of them), Eisenhowers, Reagans, Iaccocas, Pattons, Churchills provides overwhelming evidence that we should be placing more importance on leadership skill than we have been recently when choosing our govt leaders. krb

  10. The two most important jobs in the next administration ([possibly not excepting the Presidency) – I’d trust your judgement here.

  11. Cullen, I’m pretty sure I’ve seen a few different people on pragcap howling for Galbraith to be Treasury Secretary :) Shiller is fine (assuming we can’t import Andrew Haldane), but I would be happier if a Minskian ran the Fed. After all, nobody understood the way banking and finance influence the broader economic cycle better than Minsky.

      • Eric Falkenstein, don’t know if he’s actually a ‘Minskian’ but Minsky advised him and he’s pretty good IMO none the less; then again he would never get the job because he is small time.

        Also, what would you think about Barry Eichengreen?

        • I like the idea of Eichengreen at the Fed. Generally, I think an economic historian, ideally one with experience analyzing financial crises, would be an excellent choice. My best example would have Kindleberger; he would have been an ideal Fed chief due to his experience applying Minsky’s framework to economic history. Alan Taylor has also done some impressive work on the history of financial institutions and the business cycle. Brad Delong and Christina Romer, as well. Basically, we should just relocate the Berkeley economic history program…

          • Hehehe, that could be a problem if you’re not a Bernanke fan since the description “an economic historian, ideally one with experience analyzing financial crises, would be an excellent choice” fits him to a T when he was a professor. But yeah, there are a lot of US economic historians who did good work on the depression, I might add Irwin (bit specialized?) and Calomiris (a bit right wing?).

            Also why are our names red?

            • Clearly, it’s because we’re special…

              It probably has something to do with our names linking to external websites, but my initial post has a black name along with a working link, so who knows!

              I’m actually fine with Bernanke. My main problems with his Fed are regulatory, not so much his monetary policy. Though you can take that with a grain of salt, as I generally support the ‘balance-sheet recession’ argument and view most current orthodox monetary policy as impotent.

  12. I’d include Krugman to chair economic advisors and Reich to head up a new Jobs Dept (like Homeland).

  13. Maybe just end this 100 year disaster? A better standard of living now than in 1913, but at what cost?

  14. Cullen, thanks for taking the time to look over that article and make this post. I just have time to skim it now, but I’ll dig into it later.

  15. For entertainment purposes (only), I’d love to see two of the following three in there:

    Scott Sumner, Murray Rothbard, or Michael Hudson. Wouldn’t that be classic?

    Let’s put Scott in at the Fed since he admits he doesn’t understand banking. That leaves either Rothbard or Hudson as Treasury secretary… Hmmm, I wonder which would provide more entertainment? Well, to tell you the truth, I’m more sympathetic to Hudson (really!) so I think I’d prefer to watch him make the sparks fly, but either would be good. ;^)

    • Max Keiser and Peter Schiff could be pretty entertaining too though… choices, choices…

  16. Seriously though, what about Sheila Baire? Do you think she could fill one of those rolls? I like what I’ve seen of her recently.

  17. How about Gary Gorton of Yale for Federal Reserve??? He seems to have good understanding of the “Shadow Banking” and modern “Bank Runs” in the Money Market Funds system.

  18. Here, here. Great choices. I’ve always been a big Shiller fan, the guy just gets human nature and how it impacts the markets.

  19. Most likely we will get what is considered a safe pair of hands or at least an ex Goldman Sachs employee.

    Treasury Job – Robert B Zoellick president of the world back and former managing directory of Goldman Sachs.
    Fed Chairman – Bill Dudley vice chairman of the FOMC and former chief economist at Goldman Sachs.

  20. Part of my imaginary “Impossible Administration”
    Nassim Taleb – Fed Chair
    Cullen Roche – Tresury

    • Someone believing that the Govt can’t run out of money to run the treasury? Great idea. CR would experience first hand how a govt defaults :-)

  21. The FED briefings are important and need to be understood by the whole nation. So I would have it on a rotating basis to raise the profile and j”keep it fresh”. First off Penelope Cruz, and then Selma Hayek and then take it from there contact Sports Illustrated for the next contenders. I think this would assist in garnering the national interest.

    Treasury – Richard Koo until we get pass the BSR and then dump him (is that Koo’s Coup?) and then Brad and Angelina could share it with Posh and Becks….

    Easy peasy……

  22. I thought Galbraith before you even typed it (no surprise). I actually really appreciate your Shiller pick for Fed Chair, though I’m with some other readers here when I propose placing Galbraith at the Fed and someone else at Treasury. Simon Johnson, perhaps? He at least understands the dangers of class divide and plutocratic corruption.