IT WAS pretty sickening, to say the least, to see so many investors cheer the prospect of even easier US monetary policy yesterday. The news that Larry Summers was pulling out of the race to be the next Fed chairman led to a boomlet across a slew of asset classes, bolstering emerging markets in particular.
In small part, this was because a bust-up with Congress and lots of uncertainty would have been guaranteed had Barack Obama appointed Summers. But the real reason was that, maddeningly, investors remain cheap credit junkies: they want the bubble, and they want it now, regardless of consequences.
They cheered at the thought of Janet Yellen, a dove, taking the top job. But while she has a brilliant mind, she wouldn’t make the best Fed chair. Her views on monetary policy would intensify the distortions fuelled by the current policies. Summers would have been roughly as bad; most of the leading candidates for the job would, in practice if not in theory, continue to pursue a variant of the current discredited and dangerous policies.
There is one exception, and that is the 70-year old Donald Kohn, a candidate for the role and monetary policy veteran who, among other roles, is a member of the Bank of England’s financial policy committee. Kohn isn’t perfect but his recent utterances have been positively brilliant compared with those of his rivals.
Speaking yesterday at the Brookings Institution, he pointed out that “very easy monetary policy often builds imbalances that may become so large they can’t be countered by regulation”, a revolutionary thought by current standards. He also called for proper capitalism to be reintroduced in banking: “It’s critically important to put creditors at risk, to require creditors to be bailed in in the case of failure of an institution, and making sure that there’s enough bail-inable debt to resolve the institution without endangering the financial system.”
Unfortunately for Kohn, he was a Bush appointee, which means Democrats won’t like him. But he would be much better than Yellen, Tim Geithner, the ex-Treasury Secretary or Christina Romer, another name that is sometimes cited. Obama should hire Kohn, and allow him to start reinjecting a little sense into US monetary and banking policy.
THUMBS UP FOR LLOYDS SALE
It is excellent news that the privatisation of Lloyds Banking Group has finally begun. It follows the return to the private sector of Direct Line, which was spun out of the nationalised RBS, and the looming Royal Mail sell-off. Slowly but surely, some of the errors of the past are being undone, the equity markets are being reinvigorated and parts of the supply-side of the economy are being improved.
It is easy to get overly depressed at the state of the UK, our government’s apparent obsession with taxing plastic bags and all the other nonsense. I certainly plead guilty. But every so often it’s worth remembering that it is not all bad: there are lots of debits, but on the credit side of the coalition’s metaphorical bank statement, corporation tax is falling, the top rate of income tax has been cut and now the nationalised banks are starting to be returned to the stock market.
Lloyds’ gradual liberation from the dead hand of state ownership follows a little-noticed but important shift in regulatory policy by Mark Carney, relaxing the liquidity rules for banks and making additional kinds of assets eligible, a move which ought to allow for a return to cautious expansion. Combined with a much clearer relationship towards the financial services industry from the Bank, it is clear that the City has turned a corner. Global investors agree: there was vast demand for Lloyds shares last night, including from overseas. The UK and London are finally coming back to life, and not a moment too soon.