Goldman Sachs could be about to tighten its stranglehold on global markets

Gary cohn
Gary Cohn. Chip Somodevilla/Getty Images
  • President Trump is reportedly considering naming economic advisor Gary Cohn, former president of Goldman Sachs, to head the Federal Reserve.
  • His appointment would make the Fed the third major world central bank currently led by a former top Goldman executive.
  • Cohn would bring market experience to the job, but lacks any real foundation in monetary policy.

Goldman Sachs may be on the verge of consolidating its gradual takeover of global central banking, but there’s so much other stuff going on that hardly anyone is paying attention.

Thankfully, my colleague and fellow long-time Fed-watcher Simon Kennedy at Bloomberg was on the case after Politico reported Donald Trump is ready to hand over the central bank’s reins to the former president of Goldman Sachs, who is currently director of the National Economic Council.

Indeed, Cohn is a former president of Goldman Sachs. The current heads of the Bank of England and the European Central Bank both worked at Goldman, although Mark Carney actually made a career of it while Mario Draghi just racked up a few million bucks over three years. New York Fed President William Dudley is a former Goldman partner, while Robert Kaplan and Neel Kashkari, presidents respectively of the Dallas and Minneapolis Fed banks, both used to work at the megabank.

Recall, Trump ran his campaign on an anti-Wall Street agenda. “The hedge fund guys didn’t build this country.
 These are guys that shift paper around and they get lucky,” he told Face the Nation as a candidate. In a campaign ad, he went directly after Goldman Sachs CEO Lloyd Blankfein, calling him the embodiment of the global elites that “have robbed our working class.”

Since the election, Trump has embraced Wall Street advisors including Cohn, Treasury Secretary Steven Mnuchin and several others.

Revolving door concerns aside, Cohn’s appointment to the Fed could cause disruptions in financial markets because, while his Goldman stripes would make him an ally of Wall Street’s efforts to roll back post-crisis regulations, he would also be an unpredictable quantity in monetary policy at a time when continuity is very much in order.

“What is most concerning about such a significant changing of the guard at the Fed, particularly given the potential for a change in approach is that it comes late cycle,” Julia Coronado, president of MacroPolicy Perspectives and a former Fed economist, told Business Insider. “And there is little doubt the Fed will have to confront the same tricky choices about a menu of unconventional policies when the next recession hits and experience would be helpful.”

Curiously, there’s another side to the potential instability. Cohn has, under the circumstances, been seen as a sober, moderating force on a president who understands little about economic policy.  His departure from the White House might shatter any remaining confidence investors have in Trump , if there’s any left to be had following the repeated, fiasco-ridden failure of his signature healthcare law.

“If you see Cohn go to the Fed, to me, that’s an escape path for him and that means that Goldman has given up the Trump administration,” bank analyst Chris Whalen told CNBC Tuesday.

“Every time the President tweets something outlandish or is quoted as advocating a populist view on the economy or trade, investors take it with a grain of salt as they believe Cohn will prevent the White House from doing anything rash,” wrote Jaret Seiberg, an analyst at Cowen Washington Research Group, in a note to clients in May, when reports first emerged of Cohn’s interest in the Fed chief post.

“Cohn’s departure, in our view, could shake market confidence in the Trump administration and cause investors to question how this President will handle the economy.”

For one thing, Cohn has been charged with pushing through the president’s tax reform agenda, which looks increasingly troubled in the wake of Trumpcare’s spectacular and repated failure.

The shift from presidential advisor to Fed chair would not, in itself, represent a break with protocol.

“Arthur Burns did it. Ben Bernanke did it. Arguably Janet Yellen herself did it as a former CEA chair [under Bill Clinton,” said Ted Truman, a former Fed economist who is now a non-resident senior fellow at the Peterson Institute for International Economics (where I used to work).

Still, Cohn’s glaring lack of experience in the nitty gritty of monetary economics, while perhaps a point of pride for some Wall Street traders, would surely handicap him in leading a staff of mostly PhD economists. 

“A Wall Street trader’s temperament makes a bad match for the staid central-bank job,” argues Gina Choi of Reuters Breakingviews. “Goldman is known as the most alpha of the investment banks and the hard-charging job fit Cohn’s personality.” 

“Running the central bank is a more sedate affair. The staff consists of number crunchers with doctorate degrees in economics who pore over various models to analyse growth and employment,” she adds. “Press conferences after meetings by the interest-rate-setting committee are carefully scripted. Blunt talker Cohn may find such restrictions suffocating. Markets will prefer a more boring choice.”