Wednesday, July 24, 2013

Larry Summers for Fed Chair?

Rumors are swirling that Larry Summers is the front-runner for Fed Chair. Let me take a brief return to blogging to argue why he shouldn't be picked.

I don't know much about his monetary policy views, but there are two clues in his recent WSJ interview. The first was that he predicts a full economic recovery by the end of the year, after bragging about his abilities as an economic prognisticator. The Fed also forecasts a speedy return to normal growth, as it did in 2008, 2009, 2010, 2011, and 2012. While he didn't talk about the posture of the current Fed, if he foresees a recovery he must think that they are on the right track, even though there has been no recovery in employment and the core PCE deflator is close to 1 percent.

 The second clue was Summers saying that the more you rely on monetary policy the more you "increase the risk of bubbles". While he was making this argument in the context of more fiscal stimulus, this is one of the nonsense reasons hawks give for not doing more monetary stimulus now. Before, I'd been thinking that Summers might actually be a decent pick for Fed Chair, because, while he would be terrible on regulation, even he is smart enough to know that when inflation is too low and the job market is terrible the Fed needs to stimulate. Talking of bubbles and recoveries deflates that idea.

 At the end of the day, he's been on the wrong side of most major economic policy debates since 1990, especially on the regulation. There's no reason to think he wouldn't continue to be wrong.