Fed Choices

At the end of this year or early in 2014, Ben Bernanke, Chairman of the Federal Reserve Bank, is scheduled to step down after serving since 2006. During his tenure, we saw the collapse of several large investment banks, including Bear, Sterns and Lehman Bros, the merger/acquisition of traditional banks, eg, Wachovia, Countrywide, Washington Mutual and Commerce Bank, and finally, the conversion of investment banks Goldman Sachs, American Express and Morgan Stanley to bank holding companies.

During this period, many "sub-prime" banks failed due to the collapse of the secondary mortgage market, which was the vehicle by which banks would sell off loans to investors, in some cases retaining the servicing rights as additional fee income. These included, Indymac, New Century, Argent, Greenpoint and Option One.

Finally, we saw the bailouts of AIG, Fannie Mae (FNMA) and Freddie Mac (FHLBMC) which insured or held the bulk of the outstanding mortgages in the United States.

While this commentary does not seek to indict Mr Bernanke for these issues, his other actions have not helped in the long-term return to financial health in the American economy. I feel that the first engagement of Quantitative Easing (QE1), the printing of money, was necessary to stave off the imminent collapse of the economy, but  subsequent actions of this practice, QE2 and QE3 may result in an inflation spiral not seen since the 70s. And due to the fragile and slow recovery we have endured since 2009, this could easily and quickly get out of control, as there is no stop-gap measure in place or on the horizon to prevent it. Then, we could become the economy of the Weimar Republic, Germany before Hitler, when the Deutschmark could have been used as wallpaper, it was so worthless.

Currently, the names mentioned most by the administration and political pundits are Larry Summers, former Treasury Secretary in the Clinton administration and Director of the National Economic Council for President Obama, and Janet Yellin, presently the Vice Chairman of the Fed and previously President of the Federal Reserve Bank of San Francisco. Both are eminently qualified.

It is expected that Ms Yellin would continue the policies established by Mr Bernanke, while it is believed Mr Summers would take a more reserved approach to control growth and inflation.

Based on President Obama's previous approach to the economy, it appears Ms Yellin will probably be nominated, since she is more philosophically aligned with the President than is Mr Summers. But the President may just surprise us and realize another direction may be in order, since the present approach is not working as desired.

Ultimately, it will be a battle of personalities. It will come down to with whom the President feels he can best work. Knowing he has a mercurial personality himself, it is hard to say right now.

We can only hope, for the good of our economy, his choice will turn out to be the right one. Heaven help us if it's not.

              *******ALERT******

After this was written, it was reported by the the Los Angeles Times that Larry Summers has withdrawn his name from consideration and that Janet Yellin is the odds-on favorite favorite to be the nomination to replace Ben Bernanke. We will see....