The Fed is about to get less predictable–and that’s not good
Just what we don’t need: Turmoil at the Federal Reserve.
On March 1 Federal Reserve vice-chairman Donald Kohn announced that he would be stepping down in June.
Kohn has been a key No. 2 to Fed chairman Ben Bernanke throughout the financial crisis. He led the stress test of big banks and efforts to coordinate the Fed’s actions with those of its global partners through the Bank of International Settlements.
Most importantly though he’s been head wrangler helping Bernanke keep the members of the Federal Open Market Committee, the Fed’s interest-rate setting body, relatively united on policy.
With the Federal Reserve facing a huge test of discipline—Can the central bank manage to gradually withdraw the stimulus it added to the economy during the crisis quickly enough to avoid a spike in inflation or in interest rates but not so quickly that it tips the economy back into recession?—Kohn the consensus builder will be missed.
Whatever you think of the policies he helped engineer, his departure makes the Fed just a little more unpredictable, a little more vulnerable to members leaving the reservation, a little more likely to spook markets with an ill-considered word at a time when the financial markets are already worried about the Fed’s ability to find the right course.
Kohn’s departure is likely to lead to even more truculence from inflation hawks such as Thomas Hoenig, president of the Kansas City Fed.
On the morning of Kohn’s announcement, Hoenig was on CNBC pushing his view that the crisis is over and that the Fed should remove its promise to keep its benchmark interest rate near zero for “an extended period.” (For more on the role of interest-rate hawks at the Fed see my post http://jubakpicks.com/2010/02/23/are-interest-rate-hawks-pushing-policy-at-the-federal-reserve/)
Kohn’s departure adds another empty seat to the two existing vacancies on the Fed’s seven-member board of governors. The combination gives President Barack Obama a chance to shape the Fed but it also guarantees a contentious confirmation battle in the Senate over any Obama candidate.
Remember how heated the Bernanke confirmation hearings were? Expect the same when President Obama sends a nominee to fill Kohn’s chair to the Senate.
And of course, the longer all these chairs stay empty at the Fed, the harder it will be for Bernanke to build consensus and the louder the dissenting voices will sound.
Just one more thing to add to a long list of things to worry about in 2010. (For more on that list see my post http://jubakpicks.com/2010/02/16/how-to-worry-and-when-in-2010/ )
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Jim,
Personally, I think we still have to worry about deflation for now. With the banks not lending, all the “stimulus” pumped into them is not hitting the economy.
Don’t you think Ron Paul would be an excellent replacement for Kohn? LMFAO
mason,
Nah. Ron Paul is the next POTUS.
What’s POTUS Ed?
President of the United States.
I like Ron Paul. His ideas on paper look outstanding. His policies would lead to a great deal of pain for a short time instead of this incremental pain leading to the death of our economy. Its the old metaphor rip the band-aid off quickly–you know. I see a lot of Ross Perot’s ideas with Paul and, at the time, I felt Perot was right on and I voted for him(yes, now I am not ashamed to admit it). I would vote for Paul. I think an eventual return to the gold standard, bringing home the troops, more personal freedoms, less government hence less taxes–hey, I really can’t find an issue that I disagree with him on. The problem: most of america will never go for his drastic changes. Like our forefathers that framed our government, Paul’s policies are revloutionary. Their policies are the same–Paul never votes yeh on anything he feels is unconstitutional. Its very ironic but it also shows how far government has gotten away from what the framers had in mind and, consequently, how much freedom we enjoy.
mason,
I share your views. And I voted for Perot too.
Fed composition is irrelevant. Global bondholders are in charge. With the leverage taken on by central banks around the world, when the stench of risk gets strong enough, bondholders will rule the day. Watch premiums, not the Fed.
Speculation…what does Kohn see coming?
I like Paul too, but dissolving the Fed would be a disaster. They do smooth out the business cycles and while I don’t like what Greenspan and Bernanke have done, if we can get a better chairman in place they can serve a vital purpose. Plus, Americans don’t like limited Govt, no matter what they say. SS and Medicare are hugely popular, and total govt-run healthcare would be too. A small minority of ppl have a very large presence in the media. I was too young to vote for Perot, but enjoy his charts…
javos,
I like the way you think! Unfortunately, I’m afraid cynical speculation might be pointless on this one: Kohn is 68. I’m not going to second-guess a 68 year old retiring.
Fight Fight Fight !!!
“CF relaunches bid for Terra by topping Yara offer” (Yara is present in Jims portfolio)
http://www.reuters.com/article/idUSTRE62120U20100302
Re Kohn, he’s definitely done his time, and is no doubt tired. I’m his age, and until mid ’07, I was expecting an easier retirement, but de-leveraging around the world still wakes me up too damn early!
Addendum: watch also the Tea Party movement and their influence on public angst. The governing pendulum is already moving from left to center, with less maneuvering room for spend-a-holics, i.e., the proverbial punch bowl may be headed back to the kitchen. The party won’t continue much longer after that.
Jim,
You’ve turned noticeably darker of late-not that I disagree. I’ll be looking foreword to you’re new plan of how to invest in this environment.
Frank
Didn’t Perot make all his money off of government contracts? Talk about sucking from the public tit to the tune of a couple Billion (back when a Billion was real money).
Paul is an interesting college professor- lots of interesting what ifs. But very few of his economic proposals could be implemented, so he’s all theory and no action.
He’d be a great president of Fantasyland, or a great professor at the college Rodney Dangerfield attended in Back to School.
It will be interesting to see the Richard Shelby’s and Judd Gregg’s of the world rip apart whomever Obama nominates, as though they weren’t on the Banking Committee the last dozen years. I’m sure they’re SHOCKED to find out there’s been gambling with dollars borrowed from the Fed window. Should make for good press- Fox News will love it. Buy News Corp.
Jim,
Did I hear you drop the ‘truculence’ bomb?…..nice
Southof8, nice. Well, its a good thing that Perot lost, right? Because Clinton got in and continued daddy Bush’s policy of exporting our jobs. And he was so clean, right–remember Whitewater?At least Perot was working for his money–sucking off the tit of the government by providing them with computer consulting? Well, you must know better than I because you made the comment. A corporate democrat? I had never heard of the term before it was applied to Clinton. It always seemed like a paradox but in the end we know what it meant: he was being democratic to all the corporations, giving freedom to ship our jobs out of the country through NAFTA and CAFTA, etc. Paul, granted, is so far right he almost appears left. But sift through some of these ideas and there are kernels to work with. Hey, who do you know that’s better I would sure like to hear you ideas instead of comments that make you look like a “what if ” college professor. Its so easy to call people names and bust holes in their ideas. Everybody’s a critic. How about a solution?
See Joseph Stiglitz POV
http://online.barrons.com/article/SB126714429930251933.html?mod=BOL_hps_oe
Jim Bunning needs a job.
“Australia GDP Growth Accelerated to 0.9% Last Quarter (Update2) ”
http://www.bloomberg.com/apps/news?pid=20601068&sid=aRMZ3PfzOK6E
How does this effect heavy machinery, dry bulk shippers etc… ?
I was concerned about inflation and Bernanke’s plan to avoid hyper inflation until I read The Coruption of Capitalism, by Richard Duncan. Now I’m not only worried about deflation and the collapse of the derivatives market, I have nightmares. Seeing anyone with the experience of Kohn leave their post at this critical time is very unsettling.
The payroll and layoff numbers this morning are the “lowest in years”. Anyone have an idea why?
adamadamek,
Maybe companies would have laid off more if not for the snow?
Seriously though, I love how the Media is spinning “economy is still bleeding jobs” into “job loss lowest in years”. I guess if the economy hands you a lemon…
Mason and south of 8,
I agree with both of you. I think Ron paul is so far right, he is almost left. That is why I like him too, I’m a liberal. But his ideas actually make sense, yes they may work better in a classroom or a discussion, but all ideas do since there is negotiating in congress. Someone could have a great idea, and may work if implemented, but by the time the bill gets watered down in congress, it is just a shell of what it was intended to be. That is why the polls show that more people are against health care reform than for it. Because the right is against it, and the left also is against it because there is no public option. It is hard to please everyone, especially when so many people are ill informed.
By the time we get to 2012, I would be willing to guess that most of us, whether right or left, will be looking for a candidate who is not “business as usual”. Obama won the 2008 election promising “change”, but all we’ve gotten is old liberal ideas re-packaged. The country wanted REAL change, not “back to the 60′s”.
Say what you will about Ron Paul, he IS a change candidate. He’s definitely not “business as usual”, and his ideas harken back more to the Founding Fathers than any more recent politician.
It’s too soon to say whether he can win, but in a GOP field that is filled with Bush clones and rednecks, Paul does stand out.
> How about a solution?
Gold Standard as ‘solution’? If we had Gold Standard, we would be in the depths of Depression 2.9.
EdMcGon,
I think when people say that don’t want business as usual, they really want someone further to the right or left. Just look at the Tea partiers. I may be mistaken, but aren’t congress the ones that come up with the bills, Obama just has veto power? Compared to the conservative ideas we had for the last 10 years, I’d say the liberal ideas constitute change. The real problem, is that we haven’t been able to change, because conservatives are just obstructing all legislation for political gain. I think that is what people are mad at, politicians that don’t care about the american people, they are just trying to keep there offices for another 4 years.
One more reason to worry… China’s hidden debt:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aN94MF7BDx_A&pos=6
> his ideas harken back more to the Founding Fathers than any more recent politician
Ed, the Founding Fathers were not a homogenous group as your post implies. They differed greatly in economic and social issues.
It seems like Thomas Jefferson was the best of them, except that he was historically wrong in economical matters by opposing Hamilton, not that Hamilton cared about the ordinary Americans more than the bankers in New York.
bsdgv,
Please tell me you don’t think the entire Great Depression was caused by the gold standard? Do I even need to remind you the Federal Reserve was firmly in place at the time? Shall I mention Smoot-Hawley? Heavy income taxation in excess of anything we have today?
You can point to a lot of things that caused the Great Depression, but the gold standard is NOT one of them.
specialcraig,
Polls overwhelmingly show the American people are AGAINST Obama’s health care proposals. That should be the end of the discussion right there. Right or left makes no difference. Yet Obama and the Democrats are intent on ramming this monstrosity of a program down our throats.
I say go ahead Democrats: vote for this monstrosity. By the end of the 2012 elections, you’ll be on the outside of Washington looking in, when we override this power grab that you attempted.
EdMcGon,
I respectfully disagree.
EdMcGon..
I respectfully agree with your last post 100%!!
Don’t know how you feel about Bunning but I wonder how many current unemployed folks have been milking the unemployment benefits?? Personally, I know of one who collected for months and finally got a job last week because the benefits were going to run out! Is this insane or what?!!
specialcraig,
I apologize for jumping down your throat on this topic. I am just tired of having this discussion over and over again for the past year. The talking points never change, regardless of which side of the debate we’re on.
We’ll just agree to disagree on this issue and move on.
STL,
I agreed with Bunning’s position about funding. It is irresponsible for legislators to spend money without agreeing on the simple topic of how to fund it. The American people are not some money tree that is here to endlessly fund whatever Congress decides to buy.
As for unemployment benefits, for exactly the reason you pointed out. I’ve had friends over the years who lost their jobs and milked the unemployment benefits until they nearly ran out, and THEN went looking for jobs. What they forget is that money came out of their own pocket.
Just speaking for myself, last year my company furloughed me for a month. I could have gotten unemployment benefits for that period, but I chose not to. Instead, I tapped my IRA brokerage account for that time. Sure, I had to pay a tax penalty on it, but I didn’t cost the government a dime. And I made back what I pulled out in last year’s market run, so in actuality I lost nothing from my retirement, I cost the government nothing (and actually paid a little extra to it), and still made it through the furlough.
You can say, “well, that’s just you”, but I say that if you force people to find a way to survive through unemployment, they will. THAT is why I’m against unemployment benefits.
EdMcGon…
You won’t hear me say…”well, that’s just you”, but I will say that you are definitely in the minority as a man of genuine integrity!
The whole unemployment benefit thing is a bloomin’ crutch! There is NO incentive to survive or bother to get a job if a check is coming in the mail each and every week! It’s too easy for those folks to sit on their “tush” having their basic needs met. chuckling…okay, I promise to step down off my soapbox now!
Changing the subject…what are your thoughts on VTWSX?? VTI or VEU?? Maybe, I should have just asked about Vanguard in general…
STL,
It’s funny you should ask me about Vanguard, because that’s where I have my brokerage account. All in all, I’ve enjoyed their service. They have a solid reputation too.
That said, I’m not a fan of mutual funds. If you like a specific mutual fund, it’s easy enough to find it’s top holdings. Then go buy them.
As for the ones you listed, I wouldn’t go for an “all world” approach to stocks. You can do better with individual stocks.
EdMcGon,
>You can point to a lot of things that caused the Great Depression, but the gold standard is NOT one of them.
I did not say (or mean) the Gold Standard CAUSED the Great Depression. The Gold Standard was the main reason the Great Depression was so deep and lasted so long. Virtually all economists (of course, except the Libertarian ones) agree that the same thing would happen if we acted the same way in the current financial crisis.
I know you will object by pointing to the inflation that we will go through in the future. Again, all those economists agree that the inflation (10%?) will pale in comparison to what would happen if the economy came to a complete stop as in the Great Depression.
bsdgv,
The gold standard was only one piece of the Great Depression. I will admit one of the problems in the Great Depression was the economic gurus of the time trying to have their cake and eat it too. If you’re going to have a fiat currency, it needs to be completely disconnected to gold. Unfortunately, when you do that, unless you put in strict rules governing monetary expansion, you end up with recurring recessions like we’ve had since Nixon took us off the gold standard.
Basically, I’m saying choose your economic poison. If you go with a gold standard, you can’t have a central bank playing with your currency like Monopoly money. On the other hand, if you go central bank/fiat currency, do NOT tether your currency to a fixed asset like gold.
Ed, did you catch Bunning’s USA Today piece? It’s classic, and why I won’t vote for any incumbant on any level this year:
“I’ve been in congress for 24 years, and I’m SHOCKED to find there’s been deficit spending going on all this time. Why, the debt’s grown to more than $12 trillion.”
Ya think?
Good riddance to every one of the clowns.
LOL! That is classic, and rather typical of the Washington mindset.
Wow, I can’t believe Bunning said that. I agree that we need to “pay as you go”, but I find it so hypocritical that they did nothing during the Bush years, and NOW they are strict conservatives. How do you blame the whole deficit on Obie, when he inherited one of the worst economic collapses in history? I hate politics…..
specialcraig,
Just speaking for myself, I only blame Obama for taking a bad situation and making it worse. When you’re in the car about to go off the cliff, it’s a bad idea to put the pedal to the metal…