Economics, Monetary Policy, Pethokoukis

The case for Obama picking a non-Yellen for Fed chair

Wall Street so far seems to like the idea of the Federal Reserve being run by someone not named Larry Summers. And the current betting is that Fed Vice-Chair Janet Yellen is the heavy favorite to be Obama’s eventual pick. Greg Valliere of Potomac Research: “Could Obama’s tone-deafness on the Fed steer him toward a choice other than Janet Yellen?  He has virtually no option — she’s now the clear favorite — and the markets will get a more predictable policymaker than Summers would have been.”

And Chris Krueger of Washington Research Group: “There are very few options for Obama to regain some stature and popularity with his liberal supporters in the House and Senate. The easiest and most obvious would be naming Yellen as the next Fed Chair. It is about as close to a political no-brainer as you can get.”

But is the deal really sealed? Lots of bad blood right now surrounding the Summers-Yellen rivalry. The Friends of Larry in the White House are furious. That includes the president. As the Wall Street Journal reported, “Mr. Obama angrily defended Mr. Summers at a closed-door meeting with lawmakers.” Maybe Obama will go with a non-Yellen to show he can’t be rolled by his fellow Democrats, especially after the Syrian fiasco. Here briefly are the cases for and against some of the “Anybody but Yellen” scenario candidates:

1. Timothy Geithner. Pros: Known quantity to POTUS, crisis tested, understands financial regulation, consensus builder. Cons: Not a monetary economist or any kind of economist, former Obama Treasury secretary creates Fed independence issue, might be seen as too close to Wall Street, old tax troubles, liberals would scream.

2. Donald Kohn. Pros: Former Bernanke right-hand man, brings continuity, extensive monetary policy experience. Cons:  Was a George W. Bush appointee, 70 years old, liberals would scream.

3. Christina Romer.  Pros: Economist with pro-growth, market monetarist views, would be first woman Fed chair, known to White House, excellent communicator, liberals would not scream. Cons: Known to White House, a vocal Yellen supporter.

4. Gregory Mankiw. Here is what I wrote in my new National Review column:

Obama does have a unique opportunity to foster much-needed bipartisan spirit in Washington. There is growing consensus among economists on the left and right that monetary policy should be rule-based rather than discretionary and that the rule should involve targeting a certain growth in the economy’s nominal output — real GDP growth plus inflation — each year. To broadly generalize, right-leaning economists like the rule-based aspect, while left-leaning economists like that it would result in aggressive monetary stimulus when growth is weak and inflation low. So why not nominate a Republican economist, such as Harvard professor and former Romney economic adviser Greg Mankiw, who advocates nominal-GDP targeting? Not only would such a Fed nominee be apt to win broad approval and create some bipartisan momentum in Washington, but he would help depoliticize a major element of U.S. economic policy. The Summers implosion doesn’t have to be the political disaster that it’s currently shaping up to be.

Democrats are yelling for Yellen, but maybe Obama will turn a deaf ear.

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