Obama's appointment for the next Fed chair has important implications for the market and the economy. Looks like it's now down to between Larry Summers and Janet Yellen. I hope he is wise enough to pick Yellen, but he may not. And that could be because he doesn't get what the "dual mandate" is.
The Fed's dual mandate is maximum employment and stable prices. Note it's "stable prices", not "no inflation." If you listen to what Obama said in the NYT interview:
MR. OBAMA: And what I’m looking for is somebody who understands the Fed has a dual mandate, that that’s not just lip service; that it is very important to keep inflation in check, to keep our dollar sound, and to ensure stability in the markets. But the idea is not just to promote those things in the abstract. The idea is to promote those things in service of the lives of ordinary Americans getting better.
And when unemployment is still too high, and long-term unemployment is still too high, and there’s still weak demand in a lot of industries, I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation, and if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.
New bubbles? Right now the risk is dis-inflation or even deflation, and he is focusing on high inflation. Does he know that deflation is a much bigger threat than inflation? Does he know price stability means fighting against both high inflation and low inflation to maintain a stable inflation target?
Mr.Summers doesn't have a very good record in terms of forecasting the economy and in terms of economic policies. He is in the same camp as Alan Greenspan and Robert Rubin. He was too weak in advocating for a large enough stimulus to fight economy slump from the financial crisis. His credential is on the fiscal side. Why does the White House think he can do a good job in conducting monetary policy?
This is based on analyzing the words, published words. I'm glad to read NYT's take:
That is nonsense. Nothing that has occurred in the past week changes the fact that no one else can match Janet Yellen’s combination of academic credentials and policy-making experience. And no one ever confirmed to the job has come to it with as deep a grounding in both the theory and practice of monetary and regulatory policy as Ms. Yellen would bring.
......
In 1998, Mr. Rubin and Mr. Summers opposed Brooksley Born, then the chairwoman of the Commodity Futures Trading Commission, for correctly calling for the regulation of derivatives; in 2009, Mr. Summers squelched the sound recommendation of Christina Romer, then an economic adviser to Mr. Obama, for a larger stimulus. In the first Obama term, Mr. Geithner clashed unhelpfully with Sheila Bair, then the chairwoman of the Federal Deposit Insurance Corporation, and with Elizabeth Warren, then the chairwoman of the Congressional panel overseeing the bailouts.
