Over the last week, the chatter about who will succeed Ben Bernanke as the Chairman of the U.S. Federal Reserve Board has really heated up. The front runners are Janet Yellen (someone who is more dovish than Bernanke) and Larry Summers (someone who is friendly towards financing budget deficits with easy monetary policy).
However, there is a common bond between the two that suggests that the current trajectory of monetary policy will stay mostly unchanged after Bernanke’s assumed departure next January. Both Yellen and Summers are part of the same group that has been steering the financial and monetary direction of the U.S. for the last two decades (Bernanke, Alan Greenspan, Tim Geithner, and Robert Rubin are the other more prominent members of this group).
The big problem with the perpetuation of this cabal is that they are charged with trying to fix the problems that they themselves contributed to creating earlier. Obviously, they are not inclined to indict themselves by admitting to past mistakes. This removes the potential for fresh thinking in terms of coming up with new solutions to persistent problems. It is tantamount to hiring an arsonist to put out the fire that he started.
Until there is a “new guard” in place, expect a continuation of Quantitative Easing and very easy monetary policy until an inflationary wall is hit. Also, expect very little to be done on needed reforms geared at increasing competition and doing away with the “zombie corporations” that are able to live on in such a benign environment.
Yellen and Summers represent the “old guard.” Inflationary hedges such as gold and companies that are price inelastic (able to pass along price increases without hurting sales) continue to look intriguing as long as the “old guard” is in place, regardless of which individual ascends to become leader of the Fed.