- Renowned author Nassim Taleb hates Clinton’s former Treasury Secretary, Bob Rubin – or at least Taleb hates what Rubin was able to do at the expense of almost everyone else.
Mr. Rubin earned $120 million working for Citigroup in the decade preceding the 2008 financial crisis. He earned his money by encouraging the bank to take very risky bets on mortgage-backed securities, among other things.
Those bets rendered Citi insolvent after 2008, requiring almost $45 billion in taxpayer aid to bail out the bank. Mr. Rubin, however, was never punished, and he was allowed to keep all of his earnings.
Taleb calls this “the Rubin Trade” – where corporate titans can make very risky bets, get all of the upside and risk none of the downside (because they know their firms will get bailed out).
- President Trump has been criticizing the heck out of Fed Chair Powell for keeping rates too high – only to nominate a new Fed Chair who appears to be an even more “hawkish” Fed Chair. Hmmm.
- When I moved to AZ from MN in 1977, my Norwegian mom insisted on telling everyone she was going to “warsh” our clothes, “warsh” our vegetables, and “warsh her hands.” It was traumatizing for us kids, and it took us 10 years to get her to say “wash.” So, now, every time I hear the name of the new Fed Chair nominee, Kevin “Warsh,” my PTSD returns.
Why Do Fed Chairs Matter So Much?
1. “Hawkish” vs. “Dovish.”
These are terms everyone should understand, as they are used repeatedly to describe Fed Chairs. A hawkish chair is much more concerned about inflation and more likely to keep rates higher and avoid quantitative easing.
A dovish chair is more concerned about employment and economic growth and is more likely to lower rates and expand the money supply.
Volker and early Greenspan were “hawks,” while Yellen and Bernanke were “doves.” Powell is neutral or both.
Kevin Warsh (the Fed Chair nominee) is ostensibly a hawk.
2. The Problem With Bailouts and Too Low Of Rates (Dovish Policies).
Bailouts and rates that are too low do several things: (1) they foster inflation – which benefits asset holders at the expense of wage earners; (2) they benefit the wealthy at the expense of the middle class and poor; and (3) they greatly exacerbate the wealth divide.
Note: It is government policy and inflation that has fostered the wealth divide since 2008; it is not “evil capitalism” like many politicians want us to believe.
3. Wall Street Vs. Main Street.
The Trump administration wants the Fed to be much more “Main Street” focused than “Wall Street” focused, meaning much less QE (bond buying)and fewer bailouts (no more Rubin trades). Mr. Warsh is supportive of this, and that is why asset prices fell last week. And that is also why Trump nominated Warsh, despite Trump’s desire for lower rates.
Many analysts believe gold and silver prices were surging in recent weeks as a hedge against Trump nominating a dovish Fed Chair who would not act independently.
4. Same As It Ever Was.
A few quick reminders:
(1) The Fed has very little control over long-term rates, so concerns about Fed Chairs are overblown.
(2) The Fed can never be too hawkish because our economy depends on an ever-increasing supply of debt and money – so Warsh is going to be forced to support “dovish” policies no matter what.
(3) The Fed has never been particularly “independent” of political influence – so concerns about Fed independence are overblown too.
Wanna know who knows this? The markets. Not that much will change – and this is why asset prices are coming back today.
Joe Brown of Heresy Financial sums up much of this in this excellent 7-minute (at 2x speed) video: Everything You Need to Know About Kevin Warsh.
