Zero Hedge Proposes John Taylor For The Position Of Chairman Of The Federal Reserve

Tyler Durden's picture

A talking point that has gripped the media in light of the sudden weakness ahead of the Ben Bernanke reconfirmation process, is the question of who should succeed the Fed Chairman, should he fail to obtain the requisite number of votes to continue. Many have said "Ben is bad, but anyone that would come after him would likely be even worse." While this is true for any of the potential successors (Donald Kohn, ex-Morgan Stanley banker Kevin Warsh, community-banker Elizabeth Duke, Daniel Tarullo, or ex-Goldmanite Bill Dudley, and speaking of the New York Fed, where Jeff Immelt is a Class B director: did Jamie Dimon, whose membership expired on December 31, 2009, get the Goldman reconfirmation vote?), this is not an exclusive case. Which is why Zero Hedge proposes the candidacy of Stanford economist, and "Taylor Rule" creator, John Taylor for the post of Chairman of the Federal Reserve.

Those who are familiar with Mr. Taylor's body of work, will realize that he possesses the required proactive approach to monetary policy, which for nearly three decades has been absent in the halls of the Marriner S. Eccles building, where ever since the advent of Alan Greenspan, and intensifying with the actions of his successor, policy has been decidedly retroactive -  the most blatant example of which is Ben's action in the aftermath of the Jerome Kerviel SocGen fiasco in January 2008, when the futures market crumbled on what was essentially flawed risk management by a key bank, yet the Fed response was a staggering 75 bps rate cut the same day, a cut that had little to no basis in actual economic conditions, and which Barry Ritholtz called "an historical embarrassment, a blot on the Fed for all its days."

Furthermore, Taylor's recent critical overtures vis-a-vis the interpretation of his rule by the Bernanke syndicate indicates that the economist is well aware of the number one fallacy that determines current Fed decision making - the perpetually flawed "output gap" estimation, which even regional Fed Banks now warn could be a false input when the FOMC determines rates.

Zero Hedge will have more to say on the topic of Mr. Taylor's nomination, however for all those curious as to why Mr. Taylor would provide the much-needed critical approach to monetary policy, we suggest reading Mr. Taylor's WSJ op-ed from February 9, 2009, which puts the blame for the current economic catastrophe where it squarely belongs: government, and the Federal Reserve. Only a person who can see the flaws in the current system, is capable of fixing them. And as we now know, Bernanke's blatant lack of recognition of the consequences of his own actions prompted even the very respected establishmentarian Albert Edwards (ironically, of the abovementioned, and AIG-counterparty bailed out, SocGen), to wonder out loud whether the last 25 years of wealth transfer has been a criminal act enacted with the complicity of global Central Banks.

How Government Created the Financial Crisis

Research shows the failure to rescue Lehman did not trigger the fall panic.

Many are calling for a 9/11-type commission to investigate the financial crisis. Any such investigation should not rule out government itself as a major culprit. My research shows that government actions and interventions -- not any inherent failure or instability of the private economy -- caused, prolonged and dramatically worsened the crisis.

The classic explanation of financial crises is that they are caused by excesses -- frequently monetary excesses -- which lead to a boom and an inevitable bust. This crisis was no different: A housing boom followed by a bust led to defaults, the implosion of mortgages and mortgage-related securities at financial institutions, and resulting financial turmoil.

Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom.

The effects of the boom and bust were amplified by several complicating factors including the use of subprime and adjustable-rate mortgages, which led to excessive risk taking. There is also evidence the excessive risk taking was encouraged by the excessively low interest rates. Delinquency rates and foreclosure rates are inversely related to housing price inflation. These rates declined rapidly during the years housing prices rose rapidly, likely throwing mortgage underwriting programs off track and misleading many people.
Adjustable-rate, subprime and other mortgages were packed into mortgage-backed securities of great complexity. Rating agencies underestimated the risk of these securities, either because of a lack of competition, poor accountability, or most likely the inherent difficulty in assessing risk due to the complexity.

Other government actions were at play: The government-sponsored enterprises Fannie Mae and Freddie Mac were encouraged to expand and buy mortgage-backed securities, including those formed with the risky subprime mortgages.

Government action also helped prolong the crisis. Consider that the financial crisis became acute on Aug. 9 and 10, 2007, when money-market interest rates rose dramatically. Interest rate spreads, such as the difference between three-month and overnight interbank loans, jumped to unprecedented levels.

Diagnosing the reason for this sudden increase was essential for determining what type of policy response was appropriate. If liquidity was the problem, then providing more liquidity by making borrowing easier at the Federal Reserve discount window, or opening new windows or facilities, would be appropriate. But if counterparty risk was behind the sudden rise in money-market interest rates, then a direct focus on the quality and transparency of the bank's balance sheets would be appropriate.

Early on, policy makers misdiagnosed the crisis as one of liquidity, and prescribed the wrong treatment.

To provide more liquidity, the Fed created the Term Auction Facility (TAF) in December 2007. Its main aim was to reduce interest rate spreads in the money markets and increase the flow of credit. But the TAF did not seem to make much difference. If the reason for the spread was counterparty risk as distinct from liquidity, this is not surprising.

Another early policy response was the Economic Stimulus Act of 2008, passed in February. The major part of this package was to send cash totaling over $100 billion to individuals and families so they would have more to spend and thus jump-start consumption and the economy. But people spent little if anything of the temporary rebate (as predicted by Milton Friedman's permanent income theory, which holds that temporary as distinct from permanent increases in income do not lead to significant increases in consumption). Consumption was not jump-started.

A third policy response was the very sharp reduction in the target federal-funds rate to 2% in April 2008 from 5.25% in August 2007. This was sharper than monetary guidelines such as my own Taylor Rule would prescribe. The most noticeable effect of this rate cut was a sharp depreciation of the dollar and a large increase in oil prices. After the start of the crisis, oil prices doubled to over $140 in July 2008, before plummeting back down as expectations of world economic growth declined. But by then the damage of the high oil prices had been done.

After a year of such mistaken prescriptions, the crisis suddenly worsened in September and October 2008. We experienced a serious credit crunch, seriously weakening an economy already suffering from the lingering impact of the oil price hike and housing bust.

Many have argued that the reason for this bad turn was the government's decision not to prevent the bankruptcy of Lehman Brothers over the weekend of Sept. 13 and 14. A study of this event suggests that the answer is more complicated and lay elsewhere.

While interest rate spreads increased slightly on Monday, Sept. 15, they stayed in the range observed during the previous year, and remained in that range through the rest of the week. On Friday, Sept. 19, the Treasury announced a rescue package, though not its size or the details. Over the weekend the package was put together, and on Tuesday, Sept. 23, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified before the Senate Banking Committee. They introduced the Troubled Asset Relief Program (TARP), saying that it would be $700 billion in size. A short draft of legislation was provided, with no mention of oversight and few restrictions on the use of the funds.

The two men were questioned intensely and the reaction was quite negative, judging by the large volume of critical mail received by many members of Congress. It was following this testimony that one really begins to see the crisis deepening and interest rate spreads widening.

The realization by the public that the government's intervention plan had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen in the next few weeks. And this was likely amplified by the ad hoc decisions to support some financial institutions and not others and unclear, seemingly fear-based explanations of programs to address the crisis. What was the rationale for intervening with Bear Stearns, then not with Lehman, and then again with AIG? What would guide the operations of the TARP?

It did not have to be this way. To prevent misguided actions in the future, it is urgent that we return to sound principles of monetary policy, basing government interventions on clearly stated diagnoses and predictable frameworks for government actions.

Massive responses with little explanation will probably make things worse. That is the lesson from this crisis so far.

Mr. Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is the author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis," published later this month by Hoover Press.

Full John Taylor biography (we won't hold his Princeton tenure against him)

This nomination is unsolicited, Zero Hedge has not held any conversations with Mr. Taylor on the topic, and we will receive absolutely no compensation from this endorsement.

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AN0NYM0US's picture
John Taylor

Bank of Japan

Honorary Adviser, 1994-2001

and a few years later in 2003 this cheery outlook on Japan from Dr. Taylor

In sum, there are clear signs that things have changed in Japan. The building blocks for sustained, robust economic growth are being established. Further reform efforts will be needed across the spectrum of economic policy to ensure stronger growth. As the Koizumi Government continues to implement banking, regulatory, and other reform measures, a brighter economic future is in store.



Sancho Ponzi's picture

You obviously have an agenda. Do you remember Stalag 17? William Holden understood Peter Graves was the Nazi infiltrator because when he received a beating, Graves hit harder than the others. Perhaps next time you will show more finesse.

msorense's picture

Thomas Hoenig would also be a good choice. Of course I'm for abolishing the Fed altogether.  Does nothing but try to keep the rich rich and the poor poor.

Anonymous's picture

Well said. Abolishing the Fed is the best course.

But if that would not happen, then Hoenig would be the best bet according to me too.

In fact it surprises me that his name does not crop up more often.

MarketTruth's picture

The Founding Fathers wrote in the original and still legal documents that guide the United States of America that anyone who devalues the currency is guilty of treason. Such a treasonous act is punishable by death. Since the Federal Reserve is guilty of devaluing the US dollar, the Federal Reserve in whole including their main representatives (Benjamin Shalom Bernanke), board and members may soon be facing a lawsuit for treason. Now that you are aware of this fact, it is time for all Americans to inform their representatives of this fact. Any representative who votes for Benjamin Shalom Bernanke yet knows of this fact is also guilty of aiding treasonous acts against the United States of America. There is a wind of change happening in America, and this wind can not be stopped.

George the baby crusher's picture

I would agree with the Taylor nomination as he seems less dishonest then others.  But I can't for my life believe that the puppet masters of this private entity which is the FED, would let a nonconformist run their show.  As much as I would like to believe that a single man can make a difference, I'm a realist, which cushions me from disappointment.  And Tyler I'm glad we're not totally down on Princeton, they helped form Mr Taylor in some respect I presume.


Dirtt's picture

Doesn't that suck.  At such a critical juncture the fate of the USA is at stake.


POTUS could finally deliver the first chapter of "Hope & Change" right here right now. Yeah.  When Pigs Fly....

strike for return to reality's picture

There are so many able alternatives to Bernanke. 

One requirement should be that the person has actually run a real business.  (Running a govt.-connected hedge fund that makes money by front running its clients, including the govt, is not a real business.  That is running a criminal enterprise such as the vampire squid is not a qualification anymore than being Wilie Sutton is a qualification.)

Another equally important requirement is that the new person not be connected with failures of the past.  Greenspan, Bernanke and the others connected with past Treserve policy have made a lot of mistakes.  It is human nature to try to hide your errors instead of working to do what is right.  (And since many of those "mistakes" may very well be criminal, there is even more reason to try to cover up.  Stephen Friedman, your name comes to mind.)

It is early enough in Obama's administration that he can make a clean sweep.  He can do what is right for the USA (and the constitution) or he can continue to be another lackey of the vampire squid.  It is early enough into his presidency that his current mistakes can be forgiven as those of an inexperienced new President.  However, if those mistakes continue then history will list him as just another of those who sold their soul to the vampire squid and its master.

greased up deaf guy's picture

ot... sort of... fight club currently airing on bravo ;).

Chopshop's picture

i nominate Tigger Woods:

cause a FED chairman ought be rather squeamish and visibly awkward when fj*ck*ng everyone under the sun with a dumbass grin from ear to ear.

damage's picture

This guy sounds like a good choice, much better than Volcker.

Anonymous's picture

END THE FED!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

(No NEW chairman NEEDED)

Anonymous's picture

It doesn't matter who the fed chairman is or what the fed does. The financial system is hosed. Short everything.

Anonymous's picture

Might be a long shot, but why not Paul Volcker. We need a strict disciplinarian heading the Fed, once and for all burying the Greenspan/Bernanke put. John Taylor is a great candidate, but putting Volcker will result in stable long term interest rates and a strong dollar. There will be fewer instances of financial euphoria/bubbles, which will result in more efficient allocation of capital.

Silver Bullet's picture

I agree. Putting Volcker back in would be seen by the entire world as the US being bullish on the $$$.

The dollar would spike almost immdiately.

strike for return to reality's picture

It is too early to play the Volcker card, and he is smart enough to wait until things have gone thoroughly haywire. 

To put Volcker in now would merely be to position him as the scapegoat for the collapse of the US economy.

Cindy_Dies_In_The_End's picture

Volcker has already said, politely, in so many words that he is "too old for this shit". He seems willing to advise, which perhaps is enough.

rubearish10's picture

You guys really don't think Helicopter Ben gets booted, do ya? That would mean our ballsless politicians really want to make a death defying statement "for the people". What your seeing right now is "more noise" from Congress and Mr Bamma despite the "real message" from Mass. voters last week. Unfortunately, we're in another shallow market correction and we'll continue to grind ever so higher until the System cracks again. In either scenario (real change or not) , we'll have another major market event and see lower lows....Poof!

Heroic Couplet's picture

The hold on Bernanke's confirmation would have been the perfect 2-3 week time to audit the Fed then end it, and thus remove any need for a confirmation. If the private bank cartel AKA the Fed Reserve wants to reign, kick them off the North American continent and let them reign someplace else.

Anonymous's picture

Bennie is an idiot. He shouldn't have been renominated. The decision to renominate Ben reflects badly on Obama, Mr. Progressive, now Mr. Populist. It just shows that Obama is an idiot too. The non-confirmation of Ben would a very big no confidence vote on Obama. Just one of a continuing series of no confidence events; the Mass election being the most recent. Obama can orate, but he can't lead. 2012 can't come fast enough.

AN0NYM0US's picture

 July 24 (Bloomberg) -- John Taylor has a message for economists who say Ben S. Bernanke is ignoring a benchmark guide for interest rates: They’re wrong.

Taylor said his measure shows just the opposite: that Fed policy is appropriate, that central bankers are right to be considering how to withdraw their unprecedented monetary stimulus and that critics who say otherwise are misinterpreting his rule. The formula is designed to show the best rate for spurring growth without stoking inflation.


Taylor himself said there’s evidence the Fed is correctly applying his formula. He said that economists who call for negative interest rates are using projections to apply the rule in ways he never intended.


Taylor’s Codicil

“The Taylor rule says what the interest rate should be now, given current numbers,” not forecasts, he said.

Sancho Ponzi's picture

You, sir/madam, are a gutless, spineless tool.

What_Me_Worry's picture

My 1-year old is a better choice than Bernanke.  At least she occasionally understands when she did something wrong.

Problem Is's picture

They both crap in their pants and stink up our house's daily... no disrespect to your 1 year old intended W_M_W...

Anonymous's picture

Uh huh the kiss of death Sunday headline "Obama
'confident' of repeat Fed term for Bernanke."-

Anonymous's picture

Might I also suggest Arthur Liebehenschel: proven - along with a background in economics and public administration.

AN0NYM0US's picture

John Taylor Praises Greenspan

from a speech Taylor gave at Jackson Hole in 2005


"No matter what metric you use the Greenspan era gets exceedingly high marks for economic performance. The era will always be remembered for its price stability—with declining and now low, stable inflation—and for its economic stability—with only two historically short, mild recessions and three long expansions. An indication of how different things are in the Greenspan era is that the current expansion is already one of the longest in American history."

He goes on basically praising Greenspan and his policies


Alan Greenspan has had an important role in the G7 meetings of central bank governors and finance ministers, always a voice of reason, always stressing goodeconomic policy principles. He has been involved in exchange rate issues, including diplomatic efforts on the Chinese currency peg, and problems relating to current account adjustment. He has worked on IMF reform, including finding innovative ways to clarify the limits on exceptional access with an overall budget constraint. I believe that these efforts have not been emphasized enough by historians of the period; the efforts have contributed greatly to the improved economic performance of the world economy, and thereby the United States economy, in recent years. That there was no contagion from the Argentine default made it unnecessary even to consider whether a cut in interest rates in the United States was needed, as in the case of contagion following the Russian default. Clearly it is better that there was no contagion in the first place than to have had to deal with the damage, especially in the weeks after 9/11.

Concluding Remarks: Principles and Leadership

In conclusion, I believe that the lessons learned from the successful economic performance of the Greenspan era...

Orly's picture

So now we're going to Trent Lott the guy for saying kind words about a relic of the boom times?

Somehow, it doesn't seem fair to use his kind words for someone else against him when what he was saying had nothing with his own theories and ideas.

Anonymous's picture

I vote for Ron Paul to replace Bernanke. He would dismantle it faster.

After all, it doesn't matter who's in charge. Central banking is fundamentally flawed.

CB's picture

it's very doubtful RP would accept the position.

Anonymous's picture

RP would do it in a hearbeat. Bring down the house from the inside. If there's one man I would trust to do it - it would be Ron Paul.

grunk's picture

Can you imagine the document dump Ron Paul would do before they bagged him? 

Careless Whisper's picture

(we won't hold his Princeton tenure against him)

I would.

10044's picture

And I propose to get rid of the fcking monster by passing HR1207.
Btw, does Mr Taylor belong to the CFR, TriLat or the Bilderberg?? If not, he's got no chance...

Seal's picture

This is the response I got complaining about Greenscum’s then persistently low-interest rate policies. Congress – AND THE AMERICAN POPULACE – wanting the seeming something for nothing provided by a Federal Reserve that has monetized two centuries of American goodwill, are equally to blame for the downfall of the American empire.


The United States Senate

7 April 2004

Dear Mr. B…………………

As chairman of the US Senate Banking, Housing and Urban Affairs Committee I will continue to monitor interest rates and their effect on the economy. I am, however, confident in chairman Greenspan’s strong leadership and his aggressive efforts to grow and bolster the economy………

Richard Shelby


On to the future: Tighten your seatbelts people!

“The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression [recession], is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market interest by means of credit expansion. There is no means of avoiding the final collapse of the boom expansion brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further expansion, or later as a final and total catastrophe of the currency system involved.” Ludwig von Mises




Unscarred's picture

Initially, I love this nomination.  Taylor wrote the first economic text I ever read in high school, and around that same time I learned that his name was on the short list to follow Greenspan.

After reading a number of his recent op-eds, however, I wonder how rigid he would be with respect to conducting policy explicitly by his own 'Taylor Rule'.  His arguments have been consistently inflexible concerning the application of his rule, and while his arguments have been quite compelling, I openly wonder if there is a situation that could arise where the Taylor Rule could serve more harm than good.

It's a bit difficult on the ego to have a well-known monetary policy named after you, only to deviate from it while serving as the chairman of the most important policy committee in the world.  And while I like the direction that ZH is looking, he may be a bit too far right-leaning to get his nomination through this Senate.

AN0NYM0US's picture

the nice thing about a "rule" is that it works until it doesn't, at least that seems to be the way Taylor defends his namesake, as Taylor writes:

One of the advantages of rules is that they reduce arbitrary discretion and add predictability to monetary policy decisions. Predictability is a major factor in favor of rules, but if one changes the rules too much or too frequently, it creates instability.

So I say stick with the rule that worked.




Unscarred's picture

Sounds like "Fedspeak" for "Damn the torpetoes, full speed ahead!"  He's ready.

Thanks for the link.

Anonymous's picture

Perhaps another consideation is that the task at hand is not just the FED changes.....but tax structure changes....

After one reviews the tax structure of the BRIC countries will quickly realize that in order for the US to reinvent itself...the complete tax structure HAS to change....

Otherwise most other efforts will be a total waste of time....

Real Estate should not have as a major portion of its price due to tax deductions of various types.....

There should be no individual or corporate be completely replaced by a sole 15% consumption tax to be divided between the FED and the STATES....via STATE mandates....

If you do not believe this is the case ....then I would advise/challenge any politician or economist to prove otherwise....

One can construe a simple briefing by examining the BRIC rates and then in consideration of the current economic needs and conditions in the US ....this venue would be the most efficient and effective form of sustainable type recovery means....

The most important effect would be the huge increases in securities valuations which are one of the best means to lever and distribute wealth....Even Greenspan has mentioned this....

theadr's picture

Just eliminate the interest rate deduction for corporations and home loans for individuals; that'll surely fix our banking problem once and for all.  Of course don't let it transpire until let's say FYB 10/01/16.

Segestan's picture

Best man for the Job: Edward N. Luttwak. Director of Geo-economics at the Center for Strategic and International Studies of Washington D.C. and an International Associate at the Institute of Fiscal and Monetary Poicy of Japans Ministry of Finance as served on National Security Council , the White House Chief of Staff , the State Department , and the Department of Defense. Is an acclaimed Historian.


 Just saying.

Anonymous's picture

The current administration seems to pull Volcker out of the closet and dust him off whenever they want to look fiscally responsible. Exhibit 1: the presidential election. Exhibit 2: last week when it looked like their support for Bernanke was unpopular.

CB's picture

doesn't matter who's in charge because central banking lends itself to corruption no matter who's at the helm. It's the job of the people running it to favor the banks no matter what the stated purpose of a central bank is.

George the baby crusher's picture

The fox guarding the chickens.

Anonymous's picture

My nominee? Simon Johnson of MIT and formerly Chief Economist at the International Monetary Fund. Experienced in dealing with financial crises, banana republics and failed states.

We're starting Primary Wave 3 down, folks; that's DOW 1,000. Do you really care who's Fed Chairman?

the.spear's picture

I'm sorry, this is just stupid. We all know what the fed says it is and what the fed really is. If people like us can analyze its actions and recognize the fallacy and idiocy of its actions throughout its history - even if we only took a sample ten year period at literally any one point - then what good comes from proposing a candidate? I should really say, what could this person actually do that wouldn't be contrary to the long-term interests of 99.9% of every human being on this planet as opposed the 0.1% (of human pop) of the Fed's owners and beneficiaries?

On this website we have repeatedly exposed the Fed's illegitimacy and the immeasurable damage it has done to the US economy, the world economy, and the people's of these.

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