Central Bank of BernankeI have been asked on several occasions who I think the next Fed chairman will be, and what qualities that person ought to have. I think the next Fed chairman is going to be Ben Bernanke. That's why Bush asked him to head up the Council of Economic Advisers, to study him up close and personal, making sure he'd be the kind of guy the administration wanted. Of course, Bernanke is exactly the opposite of what you'd want to have in a Fed chairman, and an even more clueless variation of Alan Greenspan.
Some people have suggested that Bob Rubin might be the next Fed chairman. My response is: He's way too smart to take the job. I don't believe that anyone with a firm grasp of what's going on would even consider the position, as there is absolutely no painless (or even quasi-painless) way out.
Must Take Delivery of Greenspan's Baggage
Just as someone who's become addicted to a drug would go through some serious pain to beat the addiction, the problems that have been allowed to fester and multiply -- in terms of the debt levels, speculative activities, macro imbalances, etc. that have built up in the last 10 (or 20) years -- are not going to be cleared away without a major amount of pain.
I have advocated getting the process started by jacking up rates hard, promoting savings, taking the recession that will inevitably occur, and hope that the derivatives monstrosity that's been allowed to build doesn't get too out of control.
But who knows what's going to happen? It's a little unfair to ask somebody else to come in and clean up Greenspan's mess. The new person will only get all the blame, because most folks don't understand that the problems which will hit us were created during Al's 18-year run.
Ingredients for Fed Excellence
Meanwhile, if I was in charge (in which case, I'd also advocate a flat tax, tort reform and, most importantly, term limits), my choice for Fed chairman would have to:
1. Be completely politically independent. That's not to say he couldn't belong to one party or another, but this person should not be a politician of any sort, and the more independent, the better.
2. Show a firm grasp of the ramifications of asset bubbles.
3. Possess a demonstrable understanding of financial history.
4. Have a record of advocating sound policies for the "long term," vs. ones that are convenient for now.
5. Be well-versed in the classical Austrian School of Economics, which would mean that the person has an understanding of the monetarist's point of view. (For more information, click here for the Web site of the Ludwig von Mises Institute.
Reframing the Fed
But more important than those individual qualities, I think the idea of what the Fed is supposed to do needs to be re-examined. Folks must understand that there is a limit to central planning. (I think the former Soviet Union demonstrated that quite well.) The Fed's first task ought to be more in line with the Hippocratic Oath, i.e., do no harm. Fed members should have humility, rather than the arrogance and hubris we see demonstrated in speech after speech.
The current Fed is essentially in the price-fixing business. It has decided that it can pick the price for money (i.e., the right rate) that will make the world hum magically. (In this pursuit, it appears to be guided solely by the "applause meter.") The Fed only has two choices: fix the price of money (as it now does, poorly), or do what former Fed chair Paul Volcker did, which was to decide what the growth rate of money should be. As ephemeral a concept as money has become in the electronic age, and as difficult as it would be to create the right growth rate for money, it's a far sounder approach than trying to pick the right rate.
In any case, my thoughts on what the Fed should be and the kind of person who should be at its helm will not carry the day, just as none of my suggested reforms will, since they would require goring too many oxen of folks who've worked too long and too hard to get into positions of power.
