Big Ben Will Soon Chime for the Last Time...What Next?
For those 40 or so clients and friends of clients that attended our latest gathering at the Greensboro Country Club that featured Phil Orlando, Federated Investors Chief Equity Market Strategist and good friend to HMC Partners, you were treated to another one of his great performances. Clear, concise, animated and straightforward, Orlando gave us a lot including some seasonal bear obstacles lying before us. John Hardy spoke generally of those in last week’s blog as he recapped some of Phil’s comments. I wanted to spend time focusing on the transition from current Fed chairman Ben Bernanke to whomever President Obama and his economic advisors chooses from his cast of four of five. The two finalists seem to be San Francisco Fed President and Bernanke Disciple1 Janet Yellen who is the popular choice with many Democrats in Congress while Obama and his economic sycophant’s choice is the irascible Larry Summers. One third of Senate Democrats have allegedly signed a letter backing Yellen and warning of a fight if Obama chooses Summers because of his part in repealing Glass-Steagall when he was Treasury Secretary under Clinton. Glass-Steagall separated commercial and investment banks and the consolidation of both after the repeal was a reason for the extent of the crisis in 2008.2
Fights lead to an expenditure of political capital. With the obstacles that are present from now until year’s end, one would think this president would want to conserve some of that capital. Considering that he has little to spend and he is going to need to spend it to strike back at Syria; in October for the another Continuing Resolution; and yet another new Grand Bargain will also need to be achieved to breach another debt ceiling late in the year, it seems silly that Obama would expend the little ammunition he has on the choice of Summers….especially when he’s a person that seems to be very hard to work with.
Larry Summers has been characterized by many as a brilliant yet an arrogant bully immensely qualified on paper to Chair the Fed, but incapable to work towards consensus. By intellectual pedigree, Summers may be unrivaled as claimant to the chair. He has a bachelor's from M.I.T., a Ph.D. from Harvard, a slew of academic awards and an unmistakably brilliant mind. However according to the Executive Business Editor of the Huffington Post, Peter S. Goodman, he will steam-roll those who challenge his thinking especially when those impediments are women. According to Goodman, his run-ins with professors at Harvard were notorious and so were his recent ones with Obama staff members like Christina Romer. Romer, a Summers White House economic team colleague, sought a larger dose of stimulus spending than he deemed wise and received his wrath.3
Also in the late 1990s, Summers heavy-handed Brooksley Born, then head of the Commodity and Futures Trading Commission, when she sought to use her agency's authority to regulate derivatives. He personally called her and hollered at her, according to Born's commission colleague, Michael Greenberger, who was in the room at the time.3 "He said, 'You're going to cause the greatest financial crisis since the Great Depression, if you regulate this,'" Greenberger said.3
When Goodman saw Summers more recently, in January 2012, he remained both unrepentant and unreflective. He asked him if he had any regrets given the benefits of hindsight. Could he have done more to avoid the financial calamity? Could he have accelerated economic recovery? According to Goodman, he just scowled and dismissed his critics as people who lack the requisite sophistication about economics and politics.1
Whether or not you are a fan of Ben Bernanke’s monetary policies, they have worked to keep our economy afloat during perhaps the greatest financial challenge since The Great Depression. In building consensus in the Bernanke Fed, he also created more transparency than ever to help markets prepare. We seem to have a President who has shot himself so many times in the foot, it’s amazing that he doesn’t walk without a noticeable limp.
Creating a hot topic over two very qualified candidates when only one is universally controversial would lead most of us to an obvious conclusion. However, this President has taken many less than obvious paths. The markets will not react well with a Summers appointment as it is expected he will quickly end Qualitative Easing (QE) with little or no tapering.1 Creating consensus will not be what a Summers Fed will be interested in doing so many of the experienced Fed Presidents could be short-termers. So as Big Ben gets close to striking his last midnight, let’s just hope that this summer doesn’t see another round of Summers.
1 “Orlando’s Outlook: Seasonal bear offers bullish opportunity.” Phil Orlando. 8-30-2013. Federated Weekly Insights weekly email. 2 “Some Senate Democrats to Obama: Pick Yellen for Fed Chief. Letter calls on Obama t Nominate First Female for Chairman’s Seat.” 07/25/2013. The Wall Street Journal. 3 “Larry Summers is an Unrepentant Bully.” Peter S. Goodman. 07/25/2013. The Huffington Post.
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