The other Federal Reserve chairman candidate: Donald Kohn

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The nomination process for the next chairman of the Federal Reserve has become a high-profile contest between two candidates, Harvard professor Larry Summers and Fed Vice Chair Janet Yellen. But President Obama himself named a third option in a closed-door meeting with Democrats in July: Donald Kohn.

Kohn, currently a fellow at the Brookings Institution and a member of the United Kingdom’s central bank, is a career central banker. He spent his entire career at the Fed, serving as vice chairman through 2010, acting as Bernanke’s right-hand man throughout the financial crisis.

Kohn is considered a distant third behind Summers and Yellen. But ultimately the selection is Obama’s alone to make, and a qualified candidate less politicized than the two front-runners have become might appeal to the president.

Obama has said that he will name a selection in the fall. Here’s what is important to know about the 70-year-old Kohn in case he is picked:

Monetary Policy

The next chairman will take office as the Fed is scheduled to begin winding down the biggest policy experiment in its history, the program of quantitative easing and ultra-low interest rates.

It’s not perfectly clear what Kohn’s opinions are on the tapering the Fed’s asset purchases, partly because he left the Fed before Bernanke started the second round of quantitative easing in late 2010. In an interview with the Wall Street Journal as the purchases began, Kohn said the program "could help on the margin,” but also warned it could distort asset prices or raise fuel prices.

More recently, Kohn cast some doubt on the usefulness of the stimulus measures. After a Bernanke speech last year, Kohn asked, “Why is it that we’ve had such incredibly accommodative monetary policy for so long and we’ve had so little growth?” Otherwise, though, he has been relatively quiet about the Fed’s recent moves.

Kohn’s track record and past statements suggest that in general he would not differ drastically from Bernanke in running monetary policy: he prefers the central bank to focus on a single instrument, such as interest rates, in normal times, but is prepared to become more aggressive if markets become volatile. He did, in 2009, signal openness to a quantitative easing program like the one the Fed subsequently began. And he has indicated that he’s skeptical of following monetary rules or the monetarism favored by some conservatives, writing in 2007 that “it’s not so simple to use simple rules!”

He missed the recession

The recession caught Kohn by surprise, with many other economists. In June 2008, he said in a speech that “I believe that the most likely scenario over the next year or so is one in which economic activity firms during the second half of this year and then gathers some strength in 2009.” He also said that he thought the Fed’s 2 percent interest rate was right where it should be.

In October of that year, on the eve of the financial crisis, Kohn adjusted his expectations, calling the economy “subpar” and saying it wouldn’t pick up for another year. But he still wasn’t expecting a crisis with lingering aftereffects, stating: “I am confident that we will emerge … with a stronger and more robust financial system and with a restoration of solid and sustainable economic growth.”

By November, Kohn acknowledged that he had failed to anticipate the dangers posed by the housing bubble. “I think it is fair to say that these costs have turned out to be much greater than I and many other observers imagined,” Kohn said of the subprime crisis.

He favors strong regulation — but he didn’t always

Kohn has called “resilient” financial regulation a key part of his framework for the Fed, and has blamed weak regulation for the recession, saying in 2009 that “inadequate risk assessment and management by many financial market participants and the lagging adjustment of public oversight to the evolving structure of financial markets and rising risk levels were, in my view, the critical causes of the most severe financial crisis since the 1930s.”

But Kohn’s track record is not one of an aggressive regulator. At one infamous 2005 incident in which University of Chicago economist Raghuram Rajan, the recently appointed head of India’s central bank, warned of growing systemic risk in the financial system, Kohn sided with his mentor, Alan Greenspan, instead of Rajan. Notably, in a separate response to the same paper, Kohn’s competitor Summers called Rajan’s thesis “Luddite.”

Kohn has also separated himself from another candidate, Yellen, by saying that the Fed should not use monetary policy to prick bubbles like the 2000s' run-up in housing prices. Yellen has expressed a willingness to manipulate interest rates to deflate bubbles without harming the broader financial system.

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Joseph Lawler

Economics Writer
The Washington Examiner