Jerome Powell, the new Fed Chairman, made his debut last week. It was jarring to see a modest, reasonable, straight-talking person in that spot after 30 years of aliens from the planet Academic Finance who neither understood nor cared about how actual markets work.
I was thinking about posting a short piece on this – and how sad it is that this reasonable human would be stuck with the mess of his alien predecessors’ policies. But then – as happens a lot – Doug Noland at Credit Bubble Bulletin said it sooner and better. Here’s an excerpt:
I’ve been impressed with our new Fed Chairman. For the first time in (at least) a couple decades, I can listen intently to the head of the Federal Reserve (testimony and press conferences) without that recurring urge to roll my eyes. I feel respectful.
Alan Greenspan was the master of obfuscation. His conversations seemed guided by some game theory, and I was too often left pondering what went unsaid – and why. Greenspan’s ego, free-market ideology and personal ambitions over time fostered an overly-powerful cult status. No unelected individual should ever assume such power. And when a central banker is idolized in real time, he’s surely too accommodative. As financial innovation quickened and Bubble Dynamics took hold, Greenspan became incapable of correcting – or even admitting – mistakes.
Ben Bernanke’s formidable biases revolved around his academic research and unconventional theories. His limited experience with the markets only heightened the insecurities facing anyone replacing “The Maestro.” Bernanke had spent much of his academic career fashioning his theory that the Fed’s failure to print money after the 1929 crash was the prevailing cause of the Great Depression. A seemingly modest man had become convinced he’d unearthed the “Holy Grail of Economics”. He promised Milton Friedman on his 90th birthday that the Fed had learned from its catastrophic mistake and wouldn’t allow it to happen again. The opportunity presented itself early in his term as chairman, and Bernanke unleashed history’s greatest monetary experiment. His radical reflationary doctrine captivated – and then changed – the world.
The Wall Street Journal’s Jon Hilzenrath once referred to Bernanke as a “gun slinger.” This monetary cowboy was incapable of unbiased analysis and decision-making. As his inflationary experiment mutated beyond short-term crisis management measures, Bernanke increasingly dug in his heels. In the throes of untested monetary doctrine, he turned defensive and “100% certain” of too many things.
For traders, it’s seeing a losing short-term trade morph into a long-term “investment.” With everything invested in his runaway global experiment, Dr. Bernanke lost touch with reality – not to mention monetary conventions. He turned hostage to the financial markets, somehow promising that he would not tolerate any tightening of financial conditions – let alone a bear market, recession or crisis. What unfolded was a complete breakdown of responsible central banking.
Janet Yellen followed too comfortably in Dr. Bernanke’s footsteps. The unassuming market darling that wouldn’t dare do anything that might rock the boat; another seasoned academic with a theoretical framework that essentially posed no risk to raging market Bubbles. Gratified that unemployment was declining as core consumer inflation stayed below target, she discerned nothing problematic unfolding in the markets or economy that might risk future crisis. In the final analysis, it was a four-year term notable for a complete failure to tighten financial conditions when the backdrop beckoned for significant tightening measures. No “gun slinger”, but a competent and pleasant enabler of vicious “Terminal Phase” Bubble excess.
This history rehash is to emphasize the stark contrast between Chairman Powell and his predecessors. He’s from a completely different mold. For the first time in decades, the Fed Chairman is not beholden to ideology, academic theory nor activist monetary doctrine. This allows straightforward answers to questions. No obfuscation necessary – no extolling nor canonizing. Academic dogma need not eclipse studious observation and common sense. Powell respects the institution. And I believe his leadership will promote a soberer perspective, clearer analysis and sounder policy from our central bank.
While pundits underscore “continuity,” the markets must contemplate what this means for the Greenspan/Bernanke/Yellen “market put”. Of course, the Powell Fed’s support will be there in the event of crisis. But the timing: how much time – and market value – will pass before central banks come to the rescue? Does Powell appreciate how previous Fed policies nurtured dangerous securities market excess? Would the Chairman prefer to return to more traditional central bank management – hesitant to resort to QE, rate cuts and other tools of market intervention? Would he rather let markets deal with volatility without members of the Fed jumping to render vocal support?
I believe Chairman Powell understands the dangerous role the “Fed put” has played over the years. His bias would be to wean the markets off central bank liquidity, excessively low interest rates and aggressive “activist” market intervention. Markets would be healthier standing on their own – to reacquaint themselves with risk and prudence.
Jerome Powell faces an extraordinary challenge as Fed Chairman. If he does not move quickly and aggressively to flood the global financial system with liquidity upon the onset of financial crisis, history books will surely have him tarred and feathered. Greenspan, Bernanke and Yellen hold responsibility for history’s greatest Bubble. Yet it will be on Powell’s watch when the Fed faces the harsh consequences. In the end, he’ll be left with little alternative than more QE and zero rates – surely deemed too little too late in hindsight. Winless.
Here’s Powell’s post-FOMC meeting press conference: