And we learn more about the most powerful woman in the world.
Janet Yellen has been under wraps for some time. She did not want to give any interviews, since an unguarded remark might endanger Senate confirmation. During Senate hearings, she said as little as possible.
It was always possible to comb old speeches and papers and get the drift of her thinking. For example, she made it clear that she regards the Fed as a kind of national planning agency responsible for guiding the entire economy, not just the banker’s bank that was originally envisioned.
Could an economy succeed without being guided by a central planning authority? “Certainly not,” she said.
Did she and her fellow Phd economists know enough to overrule the market, set their own interest rates, and buy in the government’s debt with newly created money? “Yes, she confidently asserted. Never mind that logic, data, and history all say no.
In 1998, Yellen wrote a paper called Lessons From The Asian [Financial] Crisis. Despite the title, she completely missed the glaringly obvious lesson of that crisis.
Most of the east Asian countries affected did not deploy standard Keynesian stimulus measures. They did not lower interest rates and borrow and spend. They did just the opposite. Contrary to the predictions of Keynesian economists like Yellen, they recovered quickly.
This was like the depression of 1920 in the United States. Government did not respond with today’s stimulus, and as a result, the depression was over so fast that nobody even remembers it now.
By contrast, following the 1929 Crash in the United States, and again following the 1989 crash in Japan, and the 2008 crash in the United States, governments responded with standard Keynesian stimulus, and recovery was severely retarded.
In her exclusive Time interview on January 6, the day of her Senate confirmation, Yellen confirmed that she wants to see consumer price inflation higher, despite the burden this will impose on the middle class and the poor.
To that end, she wants to see consumers spending more, even though consumer debt has grown 22% over the past three years and is almost back to pre-crash levels. Student debt alone is up 61%.
Back in 2010, Yellen thought that one way to push consumers to spend more would be to charge a fee on their savings and checking accounts (so-called negative rate of interest).
This is the basic Keynesian idea that Yellen embraces: the way to cure a crisis caused by too much spending and debt is to load on even more spending and debt. The Federal Reserve will do its part by being sure savers earn no interest and by creating a lot of new money to borrow.
The Time article says that Yellen “thinks very logically” but doesn’t bother to explain why her policies defy both logic and common sense.
Nor did Time mention New York Fed president William Dudley’s recent confession that present Fed policies are not supported by any known economic theory that can be modeled. The Fed hopes they will increase employment, but cannot explain why they will.
Yellen also told Time that “the Fed had always been the agency that picked up the pieces when there was a financial crisis, and it was invented to do that.” This conveniently overlooks the Fed’s own responsibility for blowing up both the Dot-Com and Housing Bubbles, which led to the Crash of 2008, and our present depressed economy.
Yellen characteristically said nothing about the recent bubbles, but did choose to defend herself on one point. “You know, a lot of people say this [policy of creating so much new money] is just helping rich people.… It’s not true. Our policy … encourage[es] spending. And part of the stimulus comes through higher house and stock prices.”
An interviewer other than Time might have pointed out that there is no demonstrated link in economic theory between a rising stock market and rising employment levels. Besides, aren’t progressives like Yellen supposed to be against “trickle down” economics?
Bill de Blasio, the new progressive mayor of New York, said at his swearing in: “Some on the far Right continue to preach the virtue of trickle-down economics.” President Obama, who chose Yellen, also condemns this supposedly right-wing notion of helping the average American by making the rich richer. Even the Time article refers in passing to “trickle down” as something that Yellen opposes.
What passes for progressive monetary policy these days is not just confused. It is increasingly incoherent.