Category Domestic Policy

Yet Another Reason Janet Yellen Should Be Fed Chair

Danny Vinik 2 Comments

This one comes from former CFTC chairperson Sheila Bair, who participated in a panel today on restoring economic growth in America. Asked afterwards about Janet Yellen’s gender playing a role in the nominating process, she responded:

Janet Yellen can stand on her own. The fact that she’s a women should be irrelevant to this. I think her gender has been working against her. Some people have been saying that if she gets it, it’s just because she’s a woman. That’s nonsense. Of all the candidates I’ve heard about, I view her as the most qualified.

Absolutely. It should be icing on the cake for President Obama that the most qualified candidate would also be a groundbreaking choice.

Bair then brought up another aspect of Yellen’s candidacy that I haven’t seen written anywhere before: her lengthy time in public service.

[Her appointment] would make an important statement about public service. Revolving door is an accepted practice in Washington. I don’t fault people who do it. But there have been a number of high-level appointments where you’ve had people going in and out of Wall Street. Janet’s not one of those people. Most of her recent career has been in public service or in academia. Some people say, ‘Well, she doesn’t have Wall Street experience.’ I view that as a positive. She hasn’t done the revolving door. She’s got a good public image. That would be another thing that argues in her favor. Others who do come from Wall Street or have come back and forth from there  will reinforce the public’s cynicism that I worry about. But she does not have that. It would be a good tribute to those who do spend most of their time in public service.

Yellen is the best candidate for the job. Period. But this is yet another reason to select her. The Obama economic circle is littered with people with recent ties to the financial industry. That’s not a knock on them – as Bair pointed out, it’s common practice in Washington. But the Fed is going to make a lot of major regulatory decisions in the next couple of years. Wouldn’t it be nice if the Fed Chair wasn’t buddy-buddy with a bunch of bankers interested in watering down those rules?

Bair also correctly emphasizes that nominating Yellen would signal to career public servants that their loyalty to their jobs will not harm their chances of being promoted in the future. I think the counterfactual is even more convincing though. Imagine if Obama selects Summers and one of the reasons for doing so is because of his private sector experience. Now, government officials have incentives to leave their jobs to gain such experience. After all, Obama just demonstrated that not having it will reduce their chances of promotion. The revolving door isn’t necessarily a bad thing, as Matt Yglesias pointed out. But it presents the opportunity for rent-seeking and quid-pro-quo agreements that hinder federal agencies. Selecting Yellen sends a signal to government officials that private sector experience – using the revolving door – is not necessary.

Overall, it’s not a big enough reason to choose Yellen over Summers. Most public workers aren’t going to suddenly decide they desperately need private sector experience if Summers is chosen. But it is yet another advantage that Yellen has. At this point, it shouldn’t be a difficult decision for the President: Yellen is the best choice. We’ll find out soon enough.

John Taylor Espouses The Republican Line on…Everything

Danny Vinik Leave a comment

Stanford economics professor John Taylor has had a long career both in public service and in academia. The most well known monetary policy rule, the Taylor Rule, is named after him (he came up with it). The man is a big shot in the financial world.

But over the past couple of years, he’s hewed to the Republican Party line on both monetary and fiscal policy more and more. That was never more apparent than in today’s panel hosted at the National Press Club on rejuvenating America’s economy. Former CFTC Chairperson Sheila Bair and PIMCO Head Mohamed El-Erian also took part in the discussion, which covered a wide array of topics that the panelists mostly agreed upon.

All three advocated that the Fed begin to pull back its Quantitative Easing program, with Bair arguing doing so over a longer timeframe. But Taylor was the most adamant that Fed should pull out of those policies as quick as they can.

“I see no positive effect on rates from quantitative easing,” he said. “People really need to realize that we don’t know the impact of these policies. I see them as basically negative.”

Taylor also repeatedly complained about the weak economic growth. “I’m worried this recovery will never become a real recovery,” he said. He offered similar sentiments in a recent Wall Street Journal op-ed. In response, Money Monetarist (and Republican) Scott Sumner showed the inconsistency of Taylor’s remarks:

Taylor seems to think that growth has been too slow, complaining about only 2% RGDP growth in 2012.  That suggests that easier money is needed. But he also complains about QE, claiming it didn’t help the recovery. However the stock market responded very positively to rumors of QE, not once but three times.  That suggests QE boosts growth.

…

Like John Taylor, I’d like to see higher interest rates.  Unlike Taylor, I explicitly favor a more expansionary monetary policy.  I favor a higher NGDP target, which would raise long term Treasury bond yields.  He seems to favor higher interest rates via a tighter monetary policy boosting short rates (the liquidity effect.)  In my view that policy would depress long term bond yields to Japanese levels, as markets (correctly) expected a replay of the US in 1937, or Japan in 2000, or Japan in 2006, or the eurozone in 2011—4 attempts to raise short rates above zero—all premature, all 4 attempts failed.  They all drove aggregate demand and risk free long term interest rates even lower.

Taylor’s prefered policy has been repeated by Republicans ad nauseam. It’s the standard GOP line. But it isn’t right and it’s a shame that Taylor is buying into it.

The discussion also touched on fiscal issues, where Taylor continued to promote Republican policies. He advocated for reducing the budget deficit through entitlement reform, revenue neutral tax reform that broadens the base and reduces the top rate and corporate tax reform. He also lamented the uncertainty of current federal policies.

“One of the things we need to face up to is the huge increase in regulatory policies,” he said.

He then called for greater predictability of government actions. I’m more sympathetic to this view-point than most liberals, but it’s still overblown. Reducing uncertainty is a good idea. It’s not a magical cure that will unlock 5% GDP growth. What would unlock 5% GDP growth is an explicit NGDP target by the Fed. I’m sure Taylor wouldn’t support such a proposal, but it would accomplish his goal of bringing about a real recovery. Unfortunately, he’s too caught up repeating Republican lines about the worries of easy money to think about effective monetary policy.

Eminent Domain and Fair Value

Danny Vinik 2 Comments

It’s a slow news day so I’m going to return to my favorite pet subject: the use of eminent domain to help underwater homeowners. As regular readers know, I believe eminent domain could be used to help such borrowers, but the current plan being implemented in Richmond, California is outright fraud. Most analyses of it that I’ve seen have come to a similar conclusion, but University of Georgia Professor Stephen Mihm wrote a defense of the proposal last week. The piece is actually very good – particularly the history of the use of eminent domain to seize intangible assets (like mortgages). But Mihm misses the reason why Richmond’s plan is such a rip off. He writes:

Richmond’s plan is to seize 624 mortgages valued at more than the homes for which they were written. Relying on a private intermediary, the city would compensate the investor holding a mortgage at a price reflecting the home’s current value rather than an inflated bubble value.

This is the problem. Investors don’t own these homes – they own the mortgage-backed securities associated with him. Those MBS are not worth what the value of the home is. They are worth a certain amount depending on the future stream of payments from the mortgage, the initial par value of the loan, the current value of the home and the likelihood that the borrower defaults. In fact, the worst case scenario for investors is that the homeowner defaults immediately, they foreclose on the home and they only recoup the current value of the home. Thus, the minimum value of the MBS is the current home value. The actual value of the MBS is well above that. Yet, Mihm is arguing that paying those investors the current value of the home is fair value. It’s not at all.

Mihm concludes his piece by saying:

Yet to listen to the hysterical denunciations of the Richmond plan, a proposal to bring 624 mortgages in line with market prices is the epitome of eminent domain abuse. History suggests otherwise.

It may not be the greatest abuse of eminent domain, but it certainly is abuse. The private firm supplying the capital to purchase the securities – Mortgage Resolution Partners (MRP) – makes a tidy profit by buying the securities as well-below fair value. That’s the definition of abuse.

What makes this even worse is that eminent domain could be used to help those borrowers. Richmond would have to pay investors fair value for their investments – and they probably would still file lawsuits against the town – but the plan could work. Unfortunately, using eminent domain in this fraudulent manner prevents it from ever taking off in a legitimate one.