The Fed’s 100th Anniversary – Part 3: Monday Confirmation Vote Will Make Janet Yellen Second Most Powerful Person In The World

Yellen fomc

What will this mean for the average American, the middle class, and especially the poor?

In recent years, the Fed, led by chairman Ben Bernanke and since 2010 also by vice chairman Janet Yellen, has embarked on the most radical monetary experiment in US history.

It responded to the crisis of 2008, caused by too much new money and debt, by engineering an even greater flood of new money and debt.

Harvard economist Ken Rogoff accurately summed it up by saying: “We borrowed too much, we screwed up, so we’re going to fix it by borrowing more.”

(Ironically, Rogoff actually favored the policy; he just wanted an even more radical version of it.)

In the face of criticism, neither the Fed nor any of its allied Keynesian economists have ever bothered to explain how this approach of creating ever more new money and piling new debt on top of bad old debt can possibly work.

In the absence of a logical or factual explanation, they mostly just assume it will work, or sometimes argue that any action must be better than no action.

At her recent Senate confirmation hearings, Yellen asserted that more “stimulus” was needed because the economy and job market were “far short of their potential,” without explaining why policies that had created the crisis in the first place would help fix it.

She also offered a classic example of Fed double speak: “You know, if we want to get back to business as usual and a normal monetary policy and normal interest rates, I would say we need to do that by getting the economy back to normal.” Wasn’t that statement helpful?

Yellen also sidestepped a question from senator Heidi Hietkamp (D-ND) about why the middle class is not benefiting from her policies.

Nor did she want to discuss an observation by senator Mike Johanns ( R-Neb) that Fed stimulus is putting the economy on an unsustainable “sugar high,” or a similar reference by Senator Pat Toomey (R-PA) to the monetary “morphine drip” the Fed has been administering.

Naturally she did not choose to comment on German finance minister Wolfgang Schauble’s statement that the Fed’s second round of extraordinary new money creation after the Crash was “clueless.”

Nor did she explain why a third round, begun in July 2006, which Ben Bernanke had said would keep interest rates down, had actually resulted in higher interest rates.

Nor did she address Robert Skidelsky’s astute observation that the Fed’s “system of the past 30 years…has…benefit[ed] a predatory plutocracy that creams off the riches.”

Yellen believes, and wants us to believe, that her policies are succeeding. But there are good reasons to think they have backfired even in purely Keynesian terms, the terms in which the Fed itself thinks.

Lower interest rates were supposed to increase borrowing and spending and thus economic “demand.” But that turned out to count for less than the lost demand from lenders earning little or no interest. Moreover, banks have not wanted to lend when rates are artificially low and likely to rise.

Even a largely sympathetic observer, Mohammed El-Arian, CEO of the giant bond manager PIMCO, estimates that the Fed’s activities have added as little as $40 billion to economic output or ¼ of one percent of GDP. It is more likely that all the interventions have actually prevented recovery.

And what about the future? How will the Fed know when to reverse or how to reverse the “sugar high” or “monetary morphine” it is presently administering?

The Fed insists that it can quickly reverse all the new money it has conjured up anytime it wishes. Ben Bernanke said on 60 Minutes that he had 100% confidence about this. But the facts suggest otherwise.

Respected economist John Hussman has called present Fed policies a roach motel, easy to get into but hard to get out of. He calculates that lifting short term interest rates back to 2%, a very low rate by historical standards, would require the Fed to sell at least $1.5 trillion of securities on the open market. Who would buy these securities?

In recent years, the US government has counted on foreign central banks to buy US treasuries not purchased by the Fed. These foreign central banks, like the Fed, are using newly created money. And their willingness to hold more US debt has sharply waned over the past year.

The Fed’s most visible program of creating trillions of new dollars has been called “quantitative easing,” one of those terms chosen to confuse rather than to communicate.

Mainstream media commentators add to the confusion by calling it “bond buying,” deliberately omitting the pertinent fact that the “bond buying” is done with money created out of thin air.

For now, it is likely that the Fed will report less “quantitative easing,” but this shift does not mean it won’t create new money in a slightly different way, using a different term for it. This is already under consideration within the Fed building.

All this reckless new money creation subsidizes a variety of special interest groups. But it has made everything worse for the middle class and the poor, and is likely to strike even harder at them before the story is over.

Congress created the Fed 100 years ago. Since then, it has been responsible for untold economic suffering, especially during the Great Depression, but continuing to the present moment.

Economist Adam Smith anticipated the chaos created by the Fed almost 250 years ago when he wrote: “The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would…assume an authority… which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”

The Fed will now be in the hands of a woman, and an intelligent and nice woman at that, but trying to steer the US economy from the Fed is still the same old “folly and presumption.”