How smart do you have to be to run the Fed? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 16 September 2013
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Baltimore, Maryland

Our campaign to become the next Fed chief was dealt a major setback on Friday as reports washed over from Japan saying that President Obama was only days away from appointing rival Larry Summers to the post.

But wait. What's this. "Summers out of Fed race," says the Financial Times this morning.

Hey...we're back in the running!

But let's look again at why Summers would be bad for the Fed.

Yes, Summers is smarter than we are.

Yes, he has a better academic record.

Yes, he is a real economist.

Yes, he has widespread political support and a winning personality.

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But except for those things...

Studies have been done. They find that people with lower IQs actually make better truck drivers than people with high IQs. Which puts the critical question right out in the open:

    What kind of thing is running a central bank? And, how smart do you have to be to be a successful central banker?
We'll come back to those questions in a moment. First, let us note that last week was good for stocks and bad for gold. We're beginning to wonder if the trading patterns of August - sinking stocks...rising gold -- were nothing more than that wily old Mr. Market messing with our minds again. We'll have to wait to find out.

Nobody knows what will happen. At least nobody we, the Rogue Economist, have ever met or ever heard of. But we've met plenty who THINK they know...and they're the dangerous ones.

But the Fed's meddling could have an explosive effect on the stock market. QE has added about $2 trillion to the system's 'excess reserves.' That could be magnified 10 times by the fractional lending system - putting as much as $20 trillion more in purchasing power at work. Suppose it goes into stock prices!

Yes, it is possible.

Yes, dear reader, we're seeing the worst kind of 'recovery' - a return to the bubbly imbecilities of the '05 - '07 period (keep reading!). Works of art are selling for astronomical prices. High end palaces and old cars are setting new records. Is this reckless money hitting the stock-market too? If so, hang onto your hats. It could be breathtaking. It could be wild. It could be crazy...especially with Larry Summers on the bridge at the Fed.

Summers' main selling point is that he is a genius. He's so brilliant that even as a very young man he convinced one of the great names in theoretical finance, Fischer Black, to completely revise his view of how a market works.

Subsequently, Black's work on pricing options and derivatives (he ended his career at Goldman Sachs) helped win Nobel Prizes for his colleagues. They, then, were instrumental in monumental blow ups, notably of his old partner's hedge fund, LongTerm Capital Management. Goldman itself probably would have come crashing down, too, in the crisis of '08-'09 had not the US Treasury Secretary, former Goldman CEO Hank Paulson, come to its aid.

We don't know if Black ever thanked Summers for his contribution to these catastrophes.

We don't know if the Harvard Endowment ever gave Larry sufficient credit for his role in its $10 billion in losses - 2008-2009 - either.

But all that is water under the bridge. Forgotten. Forgiven. History.

So is the fact that Summers seemed to have no idea that the crisis was coming... You can read his public statements for yourself. He was as ignorant of the looming trouble as Ben Bernanke.

All of that is behind us. But what is ahead of us?

According to our friend, Gillian Tett, at the Financial Times, more of the same:
    "Insane financial system lives on post-Lehman," is her headline.
"The bad news," she continues, 5 years after Lehman Bros. went bust, "is that the system is just as insane - perhaps more so."

Why?

The big banks are even bigger.

The rich are richer.

Fannie and Freddie are still at it.

Shadow banking plays an even bigger role.

And the system depends even more on central bank management.

So you see, the next Fed chief is likely to be an even greater threat to the financial health of the world than Ben Bernanke has been. Which brings us back to our question:

How smart do you have to be to be a good Fed chief? Do you need an IQ of 150? 180? 200?

What do you get for all that computing power? Does an extra 10 points of IQ somehow reduce debt levels? Does it help you create jobs? Does it help you spot a bubble before it pops?

Not on the evidence!

Here's corollary question: Isn't it possible that Larry Summers is too smart for his own good...and too smart for the good of the world economy?

Our view is this: driving the financial system isn't rocket science. It's more like driving a truck. The idea is not to invent new theories and complex innovations. The important thing is not to run off the road!

Larry Summers? No thanks; he's been in too many accidents already.

Note to Barack Obama: It's not too late. We drive an F-150. Call us.

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

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