Terminal Velocity, Part 7
In Terminal Velocity (6)[i], the controversy surrounding the absence of Ben Bernanke at Jackson Hole later this year was introduced as a “dangerous precedent”:
“since it will now make the event a forum for speculation over his successor and the policies that they will follow……
Jackson Hole therefore becomes a diversion, distraction and dilution in varying degrees. No doubt the “Helicopter” will be spotted there, but the conditions will not be appropriate for it to land.”
It was noted that Bloomberg was “actively promoting Janet Yellen to succeed Bernanke“. The “diversions, distractions and dilutions” have now begun. More recently, former Fed Governor and current Managing Director of Macroeconomic Advisers LLC Laurence Meyer has joined the Yellen campaign[ii].
The position taken up by Adam Posen is more interesting. He assumes that Yellen gets first choice of refusal, like Meyer; however he thinks Tim Geithner should get the job if she demurs.
Both choices of Yellen and Geithner imply that the crisis is still ongoing; and that the Fed exit is a long way off. These two candidates bring an intimate knowledge of the different aspects of the crisis. Geithner was in the thick of things at Treasury; and understands where all the bodies (toxic assets) are still buried (both in the US and globally). Yellen understands that without money in the hands of people who will spend it, that QE simply perpetuates the negative feedback loop of deflation and depression economics. It is rational to assume therefore, that if Geithner is chosen the priority is to save the banks; and that if Yellen is chosen, the priority is to save the lower and middle income demographic. Geithner is not the “Helicopter Pilot”, but Yellen is. According to both Meyer and Posen’s analysis, the Job Description is currently for a “Pilot“, which suggests that the “Helicopter” is being prepared for its inaugural flight.
In our view, Geithner is much more likely to end up as the CEO of the soon to be privatized Fannie Mae[iii]. As we have opined in Housing Smoke and Mirrors (5) – “Zombie Fed”, there is a game going on between the Fed and Treasury, which will see the toxic 2005 and 2009 Mortgage Vintages permanently hidden on the Fed’s balance sheet. The clean modified performing mortgages will be held at Fannie and Freddie, who will both be merged and privatized. Geithner’s experience and skills would seem to be more constructively employed (and consummately rewarded) in this career progression.
One of the more amusing distractions, in the next Fed Chairman debate, is the issue of Stanley Fischer[iv]. Having been a key player in the creation of the bubble and systemic problems which the Fed is now addressing, during his leadership at Citigroup, his credibility has bizarrely remained strong. Perhaps this has more to do with his survival skills, which allowed him to move from poacher to gamekeeper, at a time when his insider’s view showed that his credibility bubble was just about to burst. His insider’s instincts have not left him; as he is now positioning the Bank of Israel, like a hedge fund, to be long Equities and short Treasuries as the “Helicopter” approaches[v].
One should not rush to discount Fischer however, since his candidacy is a classic example of the new political thinking behind “independent” central bank appointments. Developed Market central banks have become politicized, as a consequence of the Credit Crunch and their QE response. They are supposed to be independent however. To give a thin veneer of independence, that fools nobody, politicians have come up with the great optic of hiring head central bankers who are outsiders[vi]. The more unconventional and unorthodox the policy response contemplated, then the more “external” the appointment; the ultimate outsider being a foreigner. Politicians can thus claim that they are taking a more balanced view. In practice, they are changing the current parochial groupthink, inside the central bank, for an emerging parochial groupthink of an even smaller but more disparately connected elite. The global economy appears to get larger, as the group controlling it gets smaller.
The Bank of England has fully embraced this stunt with its appointment of Mark Carney[vii]. The Bank of Canada then went outside the bank and recruited Stephen Poloz[viii] to replace Carney. In Japan, Abe appointed the “All Souls Man” Kuroda to the BOJ[ix]. America may show a gradualist approach to this new thinking. American tradition dictates that the President exerts soft economic power, over the independent Fed, by appointing a Chairman who he (or she in the future) has a personal rapport with. Clearly there is a rapport between Obama and Geithner, which is why he is in the frame. Geithner has also made himself available by resigning from Treasury. Given the partisan nature of the American polity however, the appointment of Geithner will be framed as the kind of nepotism that Obama may not wish to be accused of. This is why the appointment of the next Fed Chair is such a diversion, distraction and dilution of time and effort.