“Stocks Soar on Summers Withdrawal” is the headline on The New York Times Web site. It appears over a Reuters dispatch reporting that Wall Street and global market indices were rising after Lawrence Summers withdrew his name from consideration to be chairman of the Federal Reserve.
Reuters explained that Professor Summers was “widely regarded as more eager to taper the Fed’s $85 million a month bond-buying program” than was Janet Yellen, another leading contender. As a result, “In early trading the Standard & Poor’s 500-share index gained 0.9 percent, the Dow Jones industrial average 1 percent and the Nasdaq composite 0.8 percent. Wall Street was following global markets higher. In afternoon trading in Europe, major bourses were as much as 1.3 percent higher. Hong Kong’s Hang Seng closed with a gain of 1.5 percent.”
The idea that the world’s companies would be worth hundreds of billions of dollars more without Professor Summers at the head of the U.S. central bank might be considered a point, or hundreds of billions of points, against him. Another way of looking at it, though, is that the dollars in which the value of those stocks are measured will be worth less if a Fed chairman or chairwoman with a looser policy than Professor Summers gets his, or her, hands, on the monetary policy levers.
As a legal matter, the Federal Reserve’s mandate is not to fuel the stock market, but to “promote effectively the goals of maximum employment” and “stable prices.” But as a practical matter, there’s a risk that in pursuing maximum employment, the Fed will foster inflation that undermines stable prices. For that reason and others, plenty of market players spend lots of time and energy and money trying to figure out what the Fed’s actions will mean for their investments.
It’s possible, I suppose, that Reuters is wrong in its assessment of an explanation for the day’s market outcome. If Professor Summers had not withdrawn over the weekend, and if the markets had still gone up, the wire service would have had to come up with some other reason to explain it. And Reuters, like its competitors, is certainly not infallible; just a few days ago its headline was, “Obama to Nominate Summers as Fed Chief: Nikkei.”
Aside from the fallibility of the press, though (with the exception in this particular case of this column, which confidently predicted in its Office Pool 2013 question on the Fed chairmanship, “Sorry, Lawrence Summers, it’s not going to be you”), what’s the takeaway from the Summers story?
The public search for a successor to Ben Bernanke is being described as an embarrassment to President Obama. But in a strange way, the contest — something like the economic version of a cross between the Pillsbury Bake-Off and the Miss America contest — only highlights the strangeness of the structure. A Washington Post editorial described the “mini-circus” as “dragging the Fed itself into Washington’s toxic political fray.”
Heaven forfend that something as important as coining money and regulating the value of the dollar, which the Constitution in Article I enumerates as a power of Congress, become a question of political discussion.
What the flap over the Fed chairmanship, in a best case scenario, has the possibility of doing is to inspire people to question the underlying set-up. The Federal Reserve Act gives considerable discretionary powers over the money supply to an unelected bureaucrat who is only indirectly accountable to either Congress or the executive branch. In a country skeptical of elites, central planning, and large, self-funding bureaucracies, the Federal Reserve is an outlier.
No wonder the President is having such a hard time finding the right person to run it.
Bill Gates once paraphrased Warren Buffett as saying “You should invest in a business that even a fool can run, because someday a fool will." Maybe there is a central banker or academic economist or other candidate for the job out there so brilliant that he or she can manage the exit strategy and unwind Chairman Bernanke’s trade without ruining the economy. But if success at the Fed requires a chairman smarter, smoother, and better-connected than Larry Summers, maybe it’s time to rewrite the job description, rethink the institution, or revise the legislation that established the position to begin with. Because if President Obama doesn’t pick a fool for Fed Chairman this time around, some president after him will, and we will all be at his, or her, mercy.