The Importance of Donald Kohn*

By James Kwak

Donald Kohn recently announced that he is resigning as vice chair of the Federal Reserve Board of Governors, after forty years in the Federal Reserve system, most of it in Washington. Articles about Kohn have generally been positive, like this one in The Wall Street Journal. The picture you get is of a dedicated, competent civil servant who has been a crucial player, primarily behind the scenes, in the operation of the Fed.

It’s a bit interesting that Kohn is generally getting the soft touch given that he was the right-hand man of both Alan Greenspan and Ben Bernanke. Here are some passages from the WSJ article:

“‘Don was my first mentor at the Fed,’ Mr. Greenspan says. Mr. Kohn told Mr. Greenspan how to run his first Federal Open Market Committee meeting, the forum at which the Fed sets interest rates. He became one of Mr. Greenspan’s closest advisers and defender of Mr. Greenspan’s policies.”

“Mr. Kohn has spent the past 18 months helping to remake the central bank on the fly as Chairman Ben Bernanke’s loyal No. 2 and primary troubleshooter.”

“Mr. Kohn has been at Mr. Bernanke’s side for nearly every critical decision during the crisis. He also has been asked to solve some of Mr. Bernanke’s biggest challenges — from finding a way to melt frozen commercial-paper markets to keeping peace among occasionally warring factions inside the Fed.”

Let’s not mince words. Kohn was one of the leading cheerleaders for the Greenspan Doctrine. Here’s one example. In 2005, Raghuram Rajan gave a now-famous paper at the Fed’s Jackson Hole conference warning of the impending financial crisis. Kohn gave a response, which we describe this way in 13 Bankers:

“Fed vice chair Donald Kohn responded by restating what he called the ‘Greenspan doctrine.’ Kohn argued that self-regulation is preferable to government regulation (“the actions of private parties to protect themselves . . . are generally quite effective. Government regulation risks undermining private regulation and financial stability”); financial innovation reduces risk (“As a consequence of greater diversification of risks and of sources of funds, problems in the financial sector are less likely to intensify shocks hitting the economy and financial market”); and Greenspan’s monetary policy resulted in a safer world (“To the extent that these policy strategies reduce the amplitude of fluctuations in output and prices and contain financial crises, risks are genuinely lower”). Kohn’s conclusion reflected the prevailing view of Greenspan at the time: “such policies [recommended by Rajan] would result in less accurate asset pricing, reduce public welfare on balance, and definitely be at odds with the tradition of policy excellence of the person whose era we are examining at this conference.”

(Emphasis added.) Now this does not mean that Donald Kohn is a bad person; it just means that he was wrong, along with Alan Greenspan and Ben Bernanke. If recent accounts are to be believed, he, like Bernanke, was relatively quick to shift gears when the crisis exploded and figure out effective responses, for which he deserves credit. (He also oversaw the stress tests, for better or worse.) But from where I’m sitting, the fewer members of the old guard, the better.

So now the question is, who will fill Kohn’s seat — and the other two empty seats on the Board of Governors? The Board is supposed to have seven members, and they matter because they have seven of the twelve seats on the Open Market Committee, which sets the fed funds rate. Business Week says that the search is being led by Tim Geithner and Larry Summers, and that the likely goal is to find people to back Bernanke.

This confuses me for a few reasons.

First, it’s not clear what Bernanke stands for. He was a Greenspan clone for about two years; then he turned into a pragmatic firefighter; and recently he’s been avoiding taking positions on issues, except to say that he’s against anything that reduces the power of the Fed (like an independent CFPA). So even if you wanted to find three mini-Bens, how would you even identify them? For starters, is he an inflation hawk or a dove?

Second, why is the Democratic establishment uniting behind Bernanke? Bernanke was a Bush appointee to the board, a chair of the Bush Council of Economic Advisers, and then Bush’s pick to replace Greenspan. He’s a Republican whose main selling point to Obama was that he was already in the job and accepted by “the markets,” and he was the clear choice of Wall Street this winter. Does this mean that Obama is going to appoint three centrists who follow the (recent) central banking orthodoxy of putting inflation control over economic growth, and who oppose tighter regulation of banks? For anyone who thinks that there is such a thing as a coherent Democratic economic policy, that seems like shooting yourself in the foot.

Finally, and I know I’m in the minority here, why are we trying to increase the power of the Fed chair — especially a Fed chair from the opposite party? Leaving aside policy questions, I think the deification of the Fed chair in the past two decades has been a decidedly bad thing. The sensitivity of the markets to one man’s pronouncements (and, just imagine, his health) is a bad thing; the fact that an unelected person is widely considered the second-most powerful person in the country is a bad thing; and if our economic fate actually depends on one person’s wisdom, that’s also a bad thing. The point of a committee is to have differing views, arguments, and a vote — not to have a bunch of suck-ups and yes men. If we put some real progressives on the board, then that’s what you would have — diversity of opinion and meaningful votes. (Including Bernanke, three of the four current members are Bush appointees, including a former investment banker and a former chair of the ABA.)

I know people will say I don’t understand, and if we had debate on the board the markets would be spooked. I think that effectively amounts to saying that dictatorship is good for the markets, so we should have a dictator.

* If you’re wondering why I begin so many posts with “The Importance of . . .,” it’s something I picked up from The French Laundry Cookbook by Thomas Keller.

10 responses to “The Importance of Donald Kohn*

  1. James who do you think should be #2 at the Central Bank? Obviously if we got more people like Tom Hoening do you think it would run better with the interest of the American people ahead of Wall Street banks and Corporate America?

  2. IMHO, the only really meaningful course for our nation & economy is to get rid of the Fed. Abolish it. Replace it with an independent senate approved body of economists & businessmen. No banksters allowed.

    Until you do that everything else is mostly meaningless esoteric crap. You’re just nibbling around the edges of the problem. You’re pissing in the wind basically. Start by electing Warren Mosler to the senate from Connecticut.

    Look at the Bank of ND & the State of ND. How are they doing compared to our central bank & wall st. banks? Marvelously, thank you. We can do much better without all of them & with 50 state banks & an independent central body.

  3. Finally, and I know I’m in the minority here, why are we trying to increase the power of the Fed chair — especially a Fed chair from the opposite party? Leaving aside policy questions, I think the deification of the Fed chair in the past two decades has been a decidedly bad thing. The sensitivity of the markets to one man’s pronouncements (and, just imagine, his health) is a bad thing; the fact that an unelected person is widely considered the second-most powerful person in the country is a bad thing; and if our economic fate actually depends on one person’s wisdom, that’s also a bad thing. (Including Bernanke, three of the four current members are Bush appointees, including a former investment banker and a former chair of the ABA.)

    The mention of the health of such a person reminds me of the part in “The Madness of King George” where Pitt, discussing the king’s mental health, says “We congratulate ourselves on how advanced our system is, but where it comes to the monarch’s health we might as well be ruled by the Turkish sultan.”

    I think one of the strongest pieces of evidence for not just Dem incompetence in general but the political stupidity of Obama specifically is how these clowns can’t even get the spoils system right.

    The spoils system is so well-established, so accepted as a prerogative of power, and so relatively innocuous (indeed it almost seems only fair, your party takes power, you hand out jobs to your guys and some pork to your voters) that they even teach it in school, a rare glimpse of truth amid the normal lies and propaganda about “good government”.

    Yet Obama’s demented “bipartisanship” fetish seems to extend even to here. He leaves in place Bernanke and others at the fed, let alone a bona fide Bush political cadre like John Dugan at the OCC. I’ve seen several lower profile examples as well, and every time I have to shake my head. Each time I say, there’s no Democrat, no good Party man who worked his tail off in 2008, who would like that job?

    Evidently not, as far as Obama’s concerned.

    And perhaps the most mind-boggling thing I’ve seen since the crisis began was a chart showing the stimulus disbursements by congressional district, where most of the top 10, including the whole top 5 if I remember correctly, were to Republican districts!

    It’s been a long time since any level of corruption, crime, or evil surprised me. But this kind of flat out basic incompetence by standards of Party Politics 101 is just amazing.

    Even if one is so soul-dead that he can still support Democrats not caring about their wickedness, surely their incompetence must be the incontrovertible indicator that they’re terminally decadent, that they will never do anything good again, only the bad.

    It’s been true for a long time now that Democrats cannot win at any significant level; they can only enter a vacuum by default where Republican evil and recklessness become too much for the voters to accept. (NB, Rep incompetence is about policy, in conception and execution, but never about their own political house-tending. They never fail to give jobs and pork to their own people. But Dems are incompetent at every level.)

    For the electorate it’s always, do we vote for the Reps or do we throw the Rep bums out? And only where they throw the bums out do they then vote Dem, because that’s currently the only alternative.

    We need an alternate alternative.

    I know people will say I don’t understand, and if we had debate on the board the markets would be spooked. I think that effectively amounts to saying that dictatorship is good for the markets, so we should have a dictator.

    Yes, market terrorism is getting really old by now. When are we going to deal with these terrorists the way they deserve to be dealt with?

    As for the dictator, we’ve long known that’s what they want. To its eternal shame the MSM sought to turn the unelected, unconstitutional Greenspan into such a figure. Paulson made it explicit in 9/08 with the original demand to be made a Treasury dictator. (The MSM and stock market terrorism sought to strong-arm us there as well, just like the Brownshirts in 1933 surrounding the Reichstag chanting “We want the Enabling Act.”)

    Since then both tracks have been accurate, as the admin keeps trying to turn the Treasury secretary into an unaccountable authoritarian while restoring the Fed chair’s old status and nimbus. That must be the “reason”, beyond enshrined wingnut welfare, that they wanted Heckuva Job Bennie back. They thought it would be a bad precedent for Fed tyranny as such if any chairman could ever fail to serve out his entire term because of outside pressures.

    Like Arendt said in Origins of Totalitarianism, the Leader doesn’t have to have any particular abilities (other than at bureaucratic infighting). The point is that once he’s installed he has to be dogmatically invested with unaccountable pseudo-“authority” and followed implicitly. (That part of her thesis applies best to established systems.) This goes a long way toward explaining wingnut welfare, and in turn the pandemic enshrinement of wingnut welfare (by business and govt, and applauded by media and academia) is strong evidence of the calcifying totalitarianims of this system.

    Now this does not mean that Donald Kohn is a bad person

    A public person’s actions are the only meaningful measure of what kind of person someone is. I can’t imagine what other metric could any relevance whatsoever.

    One’s actions are tyrannical and criminal, one is a criminal and cadre of tyranny.


  4. Second, why is the Democratic establishment uniting behind Bernanke? Bernanke was a Bush appointee to the board, a chair of the Bush Council of Economic Advisers, and then Bush’s pick to replace Greenspan. He’s a Republican whose main selling point to Obama was that he was already in the job and accepted by “the markets,” and he was the clear choice of Wall Street this winter.

    I think, James, this is the one and only answer you are looking for. Mr. Bernanke and friends are accepted by “the markets” where you could much more precisely say “by the bankster”.

    One example: why is USA’s AIG’s AIA sold to UK’s Prudential? AIA is supposedly the one “sound arm” of the taxpayers’ AIG that needs/-ed billions to be kept afloat? Asia supposedly is thee market of the future! So why sell what makes at least some money for AIG, the taxpayer? Has anybody asked the taxpayer? Or even the Government? Or is it a Trojan horse for the UK’s taxpayers?

    caw

  5. xinglongnite

    If the financial crisis proved anything, it is the need to have a Fed that could act in an expedient way that the Treasury couldn’t when the situation demands it.

    I’m not sure the issue is whether to find some people to back up Bernanke, but some people who are truly capable from outside of the old guard circle. Obviously we don’t want a dictator who does not know enough to help the country, but if we do keep Bernanke, just make sure we find people who know how not to destroy the dollar — or how to deal with the damage already done with the toxic assets.

    For the next few years it’ll be Summers doing his thing anyways, the Fed’s unfinished job is to clean up the house.

  6. Like it or not, the credit bubble and ensuing bailout has ceded the balance of economic and political power to China. What will happen next is out of the Fed’s control, but it is completely within China’s control. The financial possibilities are spiking interest rates, another asset bubble or a doubling of the price level, and we are all free to place our bets. As for the real economy, we can expect continuing job loss, Federal make work, military adventuring, tax relief for the plutocracy, destruction of the social safety net, plunder of small savers, national security hysteria, bankster and executive looting, academic doubletalk, preening by Larry Summers, mousing by Bernanke, cheerleading by Obama.

    The real danger is collapse of the social order. The charlatans who made this mess are now doing their best to avoid that in the only way they know- extend and pretend. The growth, globalization, finance model lived an extra thirty years on consumer usury, stock market bubbles and a housing bubble. No one in authority today has a clue how any other model might work.

  7. I’m thinking of nominating myself for one of the empty slots on the Fed board. Anyone know where I should send my resume?

  8. When it comes to the Administration appointing people who match the President’s progressive tendancies (I ain’t too sure of those now, of course, like everyone), I feel like I am watching Forrest Gump who said, “My Momma always said ‘stupid is as stupid does'”, and that sort of characterizes the choices made in the area of finance, with the exception of Volcker. There are lots of very progessive high end bankers and economists who would be logical choices, but we all know that there should be no link at all between any of the potential appointees and Wall Street, God, aren’t we just sick and tired of Tim and Larry, who seem to be about as progressive as Bernanke, and could easily have also served Bush.

  9. everything russ states is correct.
    My view russ is that we have in fact one leading party. We vote for the democratic or republican side of that party. both are controlled by the corporations and they deicde who we are in fact voting for.

    The plan of the corporations is that the republicans always move more right. that way the democrats can pass corporate interests and still look like they are working in our best interests. the whole thing is theater and in fact planned.

    Obama will announce a financial reform plan as a “huge victory for the people”, but since republicans have been fighting all the time it gives cover to move the legislation to the right and make it inneffectual. the theater is they can claim victory, all the while giving the corporate masters what they want. The whole thing is just media spin for the people. The best anaology I can make is that we live in a time where 1984 is reality, and what gets printed for public consumption has no basis in reality.

  10. @ chas:

    Right on target with that commentary!

    There is “nothing of inherent value” in continuing the FED. Take a good look at their track record over the past 10 years. They have been wrong at every turn, and their actions/ decisions have wrecked our country.

    Take a look at ANY of Bernanke’s prior testimonies to the Congress throughout his tenure. EVERY ONE of his forecasts, EVERY ONE of his estimates of economic strength has been either totally wrong or way off target.

    Time to audit the FED and expose the real truth about the evils of their doing!