Ruminations, August 2, 2009

Bernanke for Fed Chairman

Federal Reserve Chairman Ben Bernanke’s term expires on January 31, 2010. That means that President Obama must appoint a new chairman or reappoint Bernanke.

There has been criticism of Bernanke’s handling of his job. Among the criticisms are:

• He underestimated the liquidity needs of investors following the collapse of the housing bubble.
• Pumping money into the economy, as the Fed has done, may lead to severe inflation before the Fed can stop it.
• As a gauge of inflation, the Fed relies on “core inflation,” which excludes energy and food costs. Critics think that the excluded items need to be part of the inflation formula.
• Bailouts of financial firms have been often derided as giveaways for mismanagement.

Whether the criticisms are valid or not, Bernanke has been there from the start of the financial crisis, has shown flexibility in dealing with it and has acquired experience.

A challenger for the Fed chairmanship is the director of the National Economic Council, Lawrence Summers. Summers has impeccable credentials. An MIT grad, he holds a Ph.D. from Harvard, has been the chief economist at the World Bank and was Treasury Secretary under President Bill Clinton. He is a free-marketer and problem solver. Why not Summers?

Summers has been too closely allied with Democrats. Because the Fed is supposed to be independent, as Fed Chairman, Summers’ politics would be suspect. Recall that when Republican President Richard Nixon appointed Arthur Burns to be Fed Chairman, he reportedly instructed Burns to loosen credit so that Nixon’s chances for re-election would improve and Burns complied. Democratic President Jimmy Carter appointed G. William Miller as Fed Chairman in 1978. Miller’s previous experience in politics had been holding positions in the Johnson Administration and working for Hubert Humphrey’s presidential campaign. According to Miller, he embarked on an inflationary policy as instructed by Carter. Political expediency can and, at times, has trumped prudent fiscal policy.

The threat of inflation in the United States is not only a threat to the U. S. itself but also to the world, China in particular. China has been a customer of U.S. bonds and is concerned that the U.S. may embark on an inflationary cycle due to profligate spending and as a way to pay down its debt. China is a customer holding nearly a trillion dollars worth of our debt and doesn’t want to see that asset devalued as a result of inflation. The U.S. needs that customer as much as that customer needs us. Should China anticipate an inflationary spiral in the U.S., it might sell off its bonds and refuse to buy more – that could send U.S. interest rates soaring and precipitate a worse crisis than we have just seen. As China looks at the U.S., they want the Fed to remain independent of the Administration politics because administrations, as we have seen, often go for inflation and loose credit for the short term — even when fiscal probity would require tight credit and anti-inflationary policies. How can China be sure that the U.S. policy will be noninflationary? They can’t be, but the less political the Fed chairman is, the more likely his policies are to be independent of politics and noninflationary.

Ben Bernanke was appointed by Republican George Bush. If Democrat Obama reappoints Bernanke, he will be saying, in effect, the Fed is bipartisan and independent of the Administration. And that’s good — for the nation and for the world.

Catch 22 on North Korean and Iranian nukes

Yossarian, the protagonist of Joseph Heller’s classic novel Catch 22, was in an Army Air Force hospital with something just short of jaundice. “If it became jaundice, [the doctors] could treat it. If it didn’t become jaundice and went away they could discharge him. But just being short of jaundice all the time confused them.”

Why should it get better? “Yossarian had everything he wanted in the hospital.” Better food, better treatment and he avoided going on dangerous bombing missions.

Kind of reminiscent of the nuclear weapons programs of North Korea and Iran. Those countries are just short of having nuclear weapons. If they get nuclear weapons, we can “treat” them. If they don’t acquire nuclear weapons we can let them go away. But just being short of nuclear weapons all the time confuses us.

Why should it get better? North Korea and Iran have everything they want. Better concessions, more attention and they avoid dangerous bombing missions against them. Perhaps it’s a jaundiced view but they may have us right where they want us. Heller couldn’t have written it better.

Is health care broken?

If you brought your car in for an oil change and check-up and the mechanic told you the car was broken, what would you say? “How is it broken and how much will it cost?” If the mechanic told you that the whole thing was “broken” and it will cost you one-sixth of your annual income, you might want a more detailed explanation.

When people tell us that the American heath care system is broken and it will cost one-sixth of the national income to fix it, shouldn’t we apply the same standard to that as we would to our automobile?

In fact, one of the obstacles to health care reform may be the overstatement that our current system is “broken.” It’s not broken and most people know this. People today get outstanding health care everyday in some of the finest hospitals with best medical staffs and highest technology in the world. The object, to use the car analogy, should not be to do a complete bumper-to-bumper overhaul but a tune-up. And what needs to be tuned up?

• Health care is too closely tied to jobs; when many lose their jobs they also lose their health care. Applying for private insurance then can be a problem especially if one has a pre-existing condition.

• Pre-existing conditions are sometimes the result of people gaming the system – that is, they avoid purchasing health insurance until there is something wrong and then expect to get top-notch treatment for the cost of a small premium.

• Health insurance often pays providers from the first dollar, even if it sometimes includes a co-payment. It is like having your auto insurance pay for normal maintenance like an oil change or a gas fill-up – can you imagine the size of your auto insurance premium if that were the case?

• We demand more for less. The cost of health care has risen not because its costs are rising but primarily because of new technology, treatments and pharmaceuticals. It’s like comparing the price of a car purchased 25 years ago with a car today. Newer cars include as standard equipment, half-a-dozen air bags, anti-lock braking systems, rack and pinion steering, computer controlled warning systems, tire pressure gages, disc brakes, GPS systems, air conditioning, CD players, etcetera. One reason new cars cost so much more than older cars is that they offer so much more. One reason health care costs so much more than health care of 25 years ago is that if offers so much more.

We could cite other items for tuning but the point is that our health care system is not broken. Can it be improved upon? Absolutely. But we need to be leery of new government programs that would be a complete bumper-to-bumper overhaul of our current health care system, replacing it with one that is more costly and less effective. In effect, we don’t want to turn our health care system into a new government program that could be called “a clunker for cash.”

Quote without comment

U.S. Representative John Conyers (D, MI) last week at the National Press Club luncheon on why he hasn’t read the health care bill on which he is going to vote: "I love these members, they get up and say, ‘Read the bill.'  What good is reading the bill if it's a thousand pages and you don't have two days and two lawyers to find out what it means after you read the bill?"