Henry Kaufman, the former chief economist of Salomon Brothers in the 70's and 80's who earned the moniker of "Dr. Doom" for his frequent criticisms of the Fed's interest rate policies, has some advice for President Trump on how to pick the next Fed Chair: find someone willing to break up the "too big to fail" banks.
“You’ve got to be small enough to fail” without that failure causing problems that cascade through the financial system, Kaufman said in the question-and-answer session of an Economic Club of New York breakfast on Oct. 5 at the imposing University Club on Fifth Avenue. As it is now, Kaufman said, “We are trying to preserve conglomeration.”
It’s more important for the next Fed chief to have a good understanding of how markets work than it is to own a Ph.D. in economics or to have been a business titan, Kaufman said.
William McChesney Martin, who ran the Fed from 1951 to 1970, never earned a graduate degree in economics. But he “turned in a good performance” in overseeing a period of healthy economic growth, Kaufman said. In contrast, he said, the two Fed chiefs who followed Martin allowed high inflation to become embedded in the U.S. economy in the 1970s. The first, Arthur Burns, was a distinguished Ph.D. economist from Columbia University. The second, G. William Miller, came to the Fed from Textron Inc., where he was chief executive officer.
Of course, even though Kaufman is credited with accurately calling the market bottom on August 17, 1982, he has proven on several occasions that he doesn’t quite always get things right. He invested some of his personal wealth with Bernie Madoff, which ultimately turned out to be one of the biggest ponzi schemes in American history, and was the chairman of the Lehman board's finance and risk committee before the bank collapsed into bankruptcy in 2008...not a great track record of late.
That said, Kaufman seems to have learned from those mistakes after leaving the Economic Club of New York with the following uplifting thought: "There will be another financial crisis. And it will pop out. And we’ll all say, ‘How did it happen?’”