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Will Goldman Sachs Alum Gary Cohn Take Over the Fed Next Year?

Irwin M. Stelzer

Central Bank, est. 1913, seeks new Chair, to assume duties Feb. 5, 2018: Applicants will be considered even if they have graduate training in economics, although a doctorate might prove a deterrent to selection. Patience to sit through long staff meetings discussing arcane forecasting issues required. Ability to maintain cool while answering inane questions from congressional committees a necessity. Must remain unflappable when president withdraws support. Willingness to accept a salary of $201,700, below that of more than 100 of the employees he will supervise, essential.

That’s the ad President Trump would be placing in various financial publications if he were inclined to advertise the availability of Janet Yellen’s job come February 5, 2018. Until a few days ago, the betting in Washington was that Trump had no need to advertise that opening, since he had already decided that Gary Cohn, the former Goldman Sachs banker who now serves as director of the National Economic Council, was the man for the job.

But the battle over Civil War monuments—useful reminders of a chapter in American history or offensive tributes to those who fought to maintain slavery—resulted in riots, and presidential clumsiness, to put it mildly, in assigning blame. And it started a new civil war, this one between hard-right presidential adviser Steve Bannon and what he calls the “Goldman Sachs lobbyists,” led by Cohn. Bannon is now gone, and Cohn, reportedly “disgusted” with his boss’s flirtation with Nazi thugs, is under pressure from former colleagues and the business community to resign. And so he is deciding whether duty requires his continued presence in the dysfunctional White House, where he is regarded as the adult in the room when tax reform, infrastructure financing, and other aspects of economic policy are discussed, or whether his reputation demands that he return to Wall Street, where the sharks with which he will once again swim have an understandable and measurable goal—money—rather than the vaguer one of “influence.” He also must guess whether there is a realistic chance that by staying with Trump he will end up as chairman of the Fed, where some investors say his appointment would produce a 5 percent bump in share prices. The collapse of share prices when it seemed likely that Cohn would leave, and the rebound when Bannon was returned to the private sector, increases the probability that Cohn would stay, supports that prediction.

Cohn left Goldman when CEO Lloyd Blankfein’s seeming victory over lymphoma meant he would remain in place indefinitely. If Cohn does eventually land the Fed job, he would join other Goldman alumni serving as central bankers: Mario Draghi, president of the European Central Bank; Mark Carney, governor of the Bank of England; and three of the 12 heads of regional Federal Reserve Banks.

His lack of formal training in economics would make him the first Fed chair in 30 years not to have a Ph.D in economics. Alan Greenspan, Ben Bernanke, and Janet Yellen earned theirs from New York University, MIT, and Yale, respectively. And the Goldman-turned-central bankers now in office similarly enjoyed the opportunity to imbibe the accumulated wisdom of the discipline’s sages—Draghi, Ph.D., MIT; Carney, Ph.D., Nuffield College, Oxford. Trump’s visceral anti-intellectualism leans him, if not to Cohn, then to another non-academic who has succeeded in “the real world.”

Not necessarily a problem for Cohn. Paul Volcker, who preceded Greenspan, did not have a doctorate in economics, and he succeeded in breaking the back of the inflationary spiral willed to him by Jimmy Carter. But Volcker had President Reagan’s unequivocal backing and only one problem to confront: runaway inflation.

Life for the next Fed chairman, whether it is Cohn or some then-favorite of the President, will not be that simple. He or she will have to tackle four rather complex issues, which might not lend themselves to Cohn’s instinctual approach One is the unwinding of the Fed’s balance sheet. To prevent the Great Recession from becoming another Great Depression the Fed kept interest rates low by buying up bonds and other securities to boost their prices and support housing markets, employment, and overall economic activity (low interest rates are the flip side of high bond prices). When the Fed tried merely to taper those purchases, the bond markets threw a “taper tantrum,” threatening the recovery. No one knows how to pull off an actual disposal of the securities now held by the Fed without slowing a growth rate already deemed anaemic by the president.

Second, there is the not-small matter of regulatory policy. Although the spate of regulations set in place after the post-Lehman Brothers crash is credited by some with making another collapse of the financial system less likely, Trump will want a new chairman who is committed to rolling back many of those rules. That, says Stanley Fischer (Ph.D., MIT), Fed vice-chairman and former governor of the Bank of Israel, is “dangerous and extremely short-sighted.”

Third, one thing we do know is that we don’t know enough about how several markets work. Full employment and labor shortages are supposed to bring on rising wages and a threat of inflation. So far an unemployment rate of 4.3 percent—full employment by historical standards—has produced neither. Wages are rising only slowly, and inflation does not seem to closing in on the Fed’s preferred annual rate of 2 percent. Which makes its plan to tighten monetary policy seem premature. If the economy is not overheating, why cool it off? There is little doubt among investors and policy types that any Trump appointee would hold off the tightening planned by Janet Yellen until the growth rate significantly exceeds last quarter’s 2.6 percent.

Finally, and perhaps most important, what would a new chair do if there is another recession, with which Ford, Carter, Reagan, the two Bushes and Obama were forced to wrestle? Interest rates are already too low for further cuts to have much effect, and Republicans in Congress are unlikely to support any request for still more deficit spending. Yellen might not have created rapid enough growth and inflation to satisfy Trump, but she is a tough act for anyone to follow. The Fed “has done well in recent years,” concedes former treasury secretary and Fed critic Larry Summers. “We have not enjoyed so favorable a combination of employment and inflation for decades.”

Cohn, “aggressive … blunt … fierce,” according to a Bloomberg Businessweek trawl of former colleagues, “would be like a bulldog guiding an institution of eggheads.” Which is rather how the president sees himself.

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