October 05, 2017

President Trump, Yellen could deserve a second term at the Fed’s helm, as long as she passes the following test.

Sir, you hold that based on “the three most important counts — views on monetary policy, attitude to financial regulation and Fed independence”, Janet Yellen is a better choice than Kevin Warsh, Gary Cohn and Jerome Powell to serve as Federal Reserve chair. “Yellen deserves a second term at the Fed’s helm” October 5.

You might be right, but if it was me who counseled President Trump in these matters, I would suggest he puts the candidates up to the following initial screening test:

Fact: Banks are allowed to leverage more with assets considered safe, like loans to sovereigns, the AAArisktocracy and mortgages, than with assets considered risky, like loans to SMEs and entrepreneurs.

So ask the candidates:

Does that mean “the safe” have even more and easier access to bank credit than usual; and “the risky” have even less and on more expensive terms access to bank credit than usual?

If the answer is no, disqualify the candidate.

If the answer is yes, then ask: 

Do you think that might dangerously distort the allocation of bank credit to the real economy?

If the answer is no, disqualify the candidate.

If the answer is yes, then ask: 

In terms of what can pose the greatest risk to the bank system, would you agree with Basel II’s risk weights of 20% for what is rated AAA to AA and 150% for what is rated below BB-?

If the answer is yes, disqualify the candidate.

If the answer is no, then ask: 

Do you agree with a 0% risk weighting of sovereigns?

If the answer is yes, the candidate should be classified as an incurable statist, not independent at all, and accordingly dismissed.

If the answer is no, President Trump could proceed applying any other criteria he wishes.

The way the world looks, being a lucky person seems a quite valid one.

PS. How many of those currently in the Board of Governors of the Federal Reserve System, would pass this test?

@PerKurowski