What if Mr. Summers weren't so brilliant, after all? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 7 August 2013
What if Mr. Summers weren't so brilliant, after all? A  A  A

Poitou, France

Stocks down 93 on the Dow yesterday. Gold down $19, closing below $1,300. Nothing serious. But the autumnal trend should start to reveal itself soon. Usually, markets begin to give hints as to where they are going in August. Then, in the fall...they set out in earnest.

The bond market seems to have put in a top early May. Gold probably bottomed out in early July. And stocks? They could be topping out now. We'll have to wait to find out.

But these trends, should they continue, are bound to cause weeping and wailing at the Fed. America's central bankers have no idea what is going on...and no good idea what to do about it.

Barack Obama should call the NSA. They'll know how to get in touch with us.

On Monday, we announced that we would be open to talking about an appointment to the top job at the Fed. We didn't expect to hear from Mr. Obama immediately. It will take him a few days to figure out that his leading candidates for Fed Chairman should turn their talents elsewhere - maybe to polishing the White House silver.

According to the press accounts, the race to replace Ben Bernanke is centered on two people - Janet Yellen and Larry Summers - with Summers on the inside track. Don't discount Mr. Obama's concern for things that don't matter, however. He could go for Ms. Yellen simply for anatomical reasons. As we explained last week, a central banker who fails in his number one duty - to protect the nation's money - should be castrated. At least in that sense, Ms. Yellen has an edge.

Normally, no one would know or care who got the job at the Fed. But everyone says these aren't 'normal' times. They all seem to think the times call for an extraordinary person...a 'brilliant' person. After all, who else would be able to carry out the mission President Obama has outlined for him: to keep the economy growing, hold inflation in check, and make sure we don't create new instabilities? A tall order for anyone.

-------------------------------------- The World's Best Stock-picking Approach? --------------------------------------

We are now writing to you to reveal what we believe is the world's best stock-picking approach.

This approach multiplied one investor's wealth a whopping 5,869 times through many ups and downs!

And now, it is easy for even normal investors like you to use this approach and grow your wealth.

For full details, Click here...


The whole thing is a set-up, designed to bring into focus the one candidate whom everyone agrees is brilliant - Larry Summers. Who do you call when times aren't normal? Who else has such a brain? Quick as a viper, agile as a flim-flam man, and as penetrating as rustoleum? Yes, for these reasons, the insiders believe Larry Summers is increasingly finding favor in his master's eyes.

But what if times are really rather normal? And what if Mr. Summers really weren't so brilliant, after all?

Let us deal with the second question first. We set aside the fact that Mr. Summers managed to turn almost the entire Harvard faculty against him...and that he cost the Harvard Endowment a billion dollars, thanks to his wrongheaded interest rate speculations. Let us look at a larger and more obvious failing. In 2005, in Jackson Hole, Wyoming, Professor Raghuram Rajan described the obvious...he laid out the contours of the financial bubble to an audience that included Larry Summers. He warned that it would pop. No special analysis or deep thinking was required from Mr. Summers. He didn't have to figure it out for himself. He just had to pay attention. In the event, he did pay attention. And, as is his habit, he misunderstood. "The basic, slightly Luddite premise of this paper," he commented...is "largely misguided". Get it? Mr. Summers thinks that any mention of cycles or limits is anti-progress.

We read Mr. Summers' commentaries regularly, in the Financial Times. We don't recall a single insight worth repeating or a single proposal that merits further discussion. Like Tom Friedman, he sees problems everywhere and finds solutions for them readily. And every solution he comes up with would be neat, logical, and disastrous. Unintended consequences? Has he ever heard of the concept? For him, reason has no limits...intervention has no risks...and the world has no black swans. Seeing no danger to further monetary stimulus (consumer price inflation is still low) he will put the pedal to the metal and run at full speed...right into a brick wall.

Which brings us to the second question: how abnormal is this situation?

The US switched to a credit-based system in 1971. With this new paper money Americans could borrow a lot more money than before. Was it not normal that they did so? Total debt went from about 150% of GDP to 350%.

Then, in 2007, when even unemployed household pets had mortgages on houses at inflated prices, was it really surprising that lenders panicked? Every credit bubble is followed by a credit bust. What's not normal?

What next? The feds panicked too. Rather than let a correction do its work, they stepped in. First, a $700 billion program under George W. Bush (with $23 trillion of additional guarantees). Then, another $700 billion under Barack Obama. Then, the Fed went to work, with ZIRP, QE I, QE II, the Twist, and QE III. Isn't that just what you'd expect? The feds will do 'whatever it takes' to keep the money flowing.

But adding more credit to an economy that already suffers from too much doesn't really help. Nothing un-natural about that either. So, the economy didn't revive...it just pushed up prices for rich peoples' assets. Most people got nothing from this monetary and fiscal hullabaloo. There were 116 million Americans employed in 2008. There are only 113 million today. And the population has grown by 8 million people in the meantime. What's more, many more of today's jobs are in the low-paying service sector.

What's not normal? And what brilliant innovations will Larry Summers come up to mask the fact that the Fed's activism doesn't work?

What's needed is not brilliance at all, but dull forbearance. We need normal policies for a normal period of de-leveraging. So far, only one candidate for the Fed chairmanship has demonstrated the lack of brilliance required. He alone understood what was happening in 2005-2007 and he now appreciates the limits of central bank activism. You know who that candidate is: yours truly.

Repeatedly, he warned, in sober economic terms, that 'this Vesuvius of debt is going to blow sky-high,' or words to that effect. Then, when the lava flowed in 2008-2009, he foresaw the Fed response and predicted that it 'won't do a damned bit of good.'

And now, he knows what to do. The Fed should back off. Sit tight. And let markets do their work.

It's time for a change.

Mr. Obama, we're standing by the phone.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "What if Mr. Summers weren't so brilliant, after all?". Click here!

1 Responses to "What if Mr. Summers weren't so brilliant, after all?"


Aug 7, 2013

One should have common sense of running a lower middle class family well to run the country. What Mr Raghu Rajan forcasted in 2005 about ensuing crash of 2008 , was the extension of the same thought process. One can not create money artificially.
Today USA is minting Dollars, but some one has to face consequence. In present economic environment, when whole world worships Dollar, the rest of the World ( minus US) has to suffer and is suffering. Have you heard about a country which prints Dollars in name of quantitative easing and does not face devaluation of his currency ? Dollar is still appreciating day by day against majority of the currencies. God save this World !!!

Like (1)
Equitymaster requests your view! Post a comment on "What if Mr. Summers weren't so brilliant, after all?". Click here!

Recent Articles:
A Darkness Is Spreading Across the US
August 22, 2017
Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.
Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working
August 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Which Gods Will Bring Down the US Empire?
August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?