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Monday, October 19, 2009

Replace Ben Bernanke with Paul Volcker

Last week, the Federal Reserve statistical release (G.17) reported on industrial production and capacity utilization for the economy.

“Industrial production rose 0.7 percent in September after an upwardly revised gain of 1.2 percent in August. For the third quarter as a whole, output advanced at an annual rate of 5.2 percent, the first quarterly gain since the first quarter of 2008 and the largest gain since the first quarter of 2005. Production in manufacturing increased 0.9 percent in September, and the index excluding motor vehicles and parts rose 0.5 percent. Mining output strengthened 0.7 percent, while the output of utilities fell 0.7 percent. At 98.5 percent of its 2002 average, total industrial production was 6.1 percent below its level of a year earlier. In September, the capacity utilization rate for total industry increased to 70.5 percent, a level 10.4 percentage points below its average for 1972 through 2008.”

The Los Angeles Dodgers skipper, Joe Torre, when recently asked what the difference is managing during the regular season versus the post-season playoffs replied, to paraphrase Joe, in the regular season, you think about making a change; you consider it, then you follow your gut instincts. In post-season, you don’t consider making changes – you make changes. The inference here is years of experience are superior to rationalization.

Conventional wisdom said that no other American was more qualified to be Chairman of the Federal Reserve Board, if America found itself heading into another great depression, than Ben Bernanke. I submit that with interest rates nowhere to go but up; a weakening dollar, and massive budget deficits for years to come, the best person to run the Federal Reserve over the next two years is Paul Volcker.

At first blush, this idea may seem radical, but these are not ordinary times. What are the benefits if President Obama figuratively walks out to the pitcher’s mound, take the ball from Bernanke, and say, “Ben, you threw one hell of a game for eight innings. We can take it from here; the economy is heating up.” Then, Obama turn towards the bullpen forms his hand into the shape of a clam, opens, and closes it twice, to signal for his major league inflation closer – Paul Volcker.

This is presidential managing.

For starters, the world will know any future inflation in the US will be tame. When the cover of Barron’s is instructing the fed chief and the FOMC to raise rates at their next meeting, November 3-4 from 0.15% to 2.00%, perhaps he is hard-wired for fighting depression and we have gotten his A game – just when we needed it. But now, crisis accomadative monetery policy must give way to normal accomadative monetery policy.

The price of gold and our money supply is at all time highs. The SPDR Gold Shares (GLD) is now the second largest ETF behind the SPDR S&P 500 Index, holding $35 billion in assets. Only four central banks and the IMF control more gold, according to the World Gold Council. As the economy expands, do you really need a guy hanging around nicknamed “helicopter Ben”, named for vowing to spread money from helicopters to stop a depression from occurring, when too much liquidity is making too many people nervous?

This also sets a precedent. It was logical, I suppose, to move Tim Giethner from the Federal Reserve Bank of NY to Secretary of the Treasury to help thaw the frozen major center banks. The FDIC insurance fund is in the red, the (Unofficial) Problem Bank List at Calculated Risk show 479 names, therefore, most of the action over the next two years will occur in local and regional banks. Moving FDIC Chairman Sheila Baird to Secretary of the Treasury will maximize the power of the treasury to minimize the next leg of the banking crisis. On the other hand, maybe Volcker has a short list of candidates.

Cabinet members come and go all the time. Moreover, no one believes that it has to do with spending more time with the family. At least these are strategic reasons to point to if anxiety grows over persistent problems in the economy.

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