This column originally appeared on Real Money Pro at 8:18 a.m. EDT on Sept. 17.NEW YORK ( Real Money) -- I have long written that Lawrence Summers would be slightly negative for the markets and that Janet Yellen was neutral to the markets. I never bought into the notion, as expressed by Jim Cramer on "Mad Money" last night, that Summers' polarizing presence would somehow act as a "one-man wrecking crew" for the markets. I have guesstimated a downward influence of about 25 to 50 S&P 500 points to a Summers nomination/appointment and virtually no impact to a Yellen nomination/appointment. The basic reason I held to this view was not that Summers would be more hawkish but rather there would be far less transparency in a Summers Fed vs. a Yellen Fed. And this would lead to more market volatility. To me, the market's Sunday-night and early-Monday gap in futures (up 24 handles) was a total overshoot to reality, as it seemed almost entirely based on the euphoria that Summers was bowing out. On the principal bases (regulatory and monetary policies, personality and forecasting ability), Yellen is simply " a whiter shade of pale" than Summers.
Policy FailuresBottom line: I expect little divide between the policy of a Summers-led Fed or a Yellen-led Fed. And this is the market rub: The shoulders of the Fed have been the primary support to domestic economic growth since the crisis in 2008-2009, since our political leaders in Washington, D.C., have been inert, irresponsible and unwilling to come to meaningful compromise in the face of continued structural challenges. While monetary policy has taken on a progressively greater responsibility to energize growth, quantitative easing and zero interest rate policy are growing less effective. Indeed, as Albert Einstein is often credited to have said, "The definition of insanity is doing the same thing over and over again and expecting different results." Recently, in King World News interview, Bill Fleckenstein delivered a variation on Einstein's apocryphal quote more vividly in describing our monetary fantasy:
Right now, people continue to believe that the same idiots that created all of these problems, namely the central banks, are going to somehow get us out of it with the exact same policies that got us into it.... We had so much artificial stimulus, and we've misallocated so much capital (that Americans) believe in the lunatics at the Fed, and the rest of the Western world is that way (as well).... As the fantasy dies ... more people will see that the Fed is trapped.In summary, I see little difference between Summers and Yellen, and the jubilation on Sunday and Monday (following the Summers announcement) seems misplaced.
Summers vs. Yellen: Regulatory PolicySummers and Yellen share similar views on many regulatory issues, according to a review of their public statements and interviews with friends and colleagues. Both forged academic careers as members of the economics counterculture that attacked the dogma of efficient markets. They both believe that markets require regulation to prevent abuses, ensure fair competition and prevent disruptions of economic growth. Regulatory policy will be important in upcoming years and, as contained in a recent New York Times article, "
Summers vs. Yellen: Monetary PolicyThe reality is that Janet Yellen might be somewhat more dovish than Larry Summers, but even a number of Fed members have questioned the efficacy of quantitative easing and the wisdom that the only prescription to promote economic growth is more cowbell. It remains my view that as we move out over time, it will become increasingly clear that more easing will be ineffective or even counterproductive. So, the marginal differences in Summers'/Yellen's hawkish/dovish monetary views will further lose significance.
Summers vs. Yellen: PersonalityI get that Summers is polarizing and that Yellen is a consensus builder, but I can make the case that the challenges ahead are so monumental that a Volcker-like Fed chairman (i.e., Summers) is preferable to a conciliatory Yellen.
Summers vs. Yellen: Forecasting Accuracy and Oversight
"For my own part, I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the SIV's -- I didn't see any of that coming until it happened." -- Janet Yellen, Financial Crisis Inquiry Commission (2010)As well, Janet Yellen should be considered no better or worse a forecaster than her predecessors nor relative to Summers' accuracy of projections in the past. Indeed, all of the previous Fed members missed the credit bubble but not many defended the housing bubble and the disastrous Fed policy of letting them play out (as Yellen did) and then tried to print up the pieces. (If you don't believe me, check out this Yellen speech back in late 2005.)