Yellen Unlikely to Stop Fed’s Money-Printing Addiction

rNow that former Clinton Treasury Secretary Treasury and former Harvard University president Larry Summers has withdrawn his name from consideration as the next chairman of the Federal Reserve, Fed Vice Chairman Janet L. Yellen has seemingly become the leading candidate for the job. She would replace Ben Bernanke whose term expires in January. If appointed, Yellen would be the first woman to chair the Fed.

Yellen’s apparent good fortune was engendered by Summers’ withdrawal, triggered in large part by the staunch opposition to his nomination by at least five Democratic senators, including Elizabeth Warren (D-MA). Many of them believed Summers’ relationship with Wall Street was too cozy, and that he bore considerable responsibility for the economic meltdown of 2008. Warren made it clear that she was happy with the sudden turn of events. “Janet Yellen, I hope, will make a terrific Federal Reserve chair,” Warren said on MSNBC. “The president will make his decision, but I hope that happens.”

The stock market was equally elated. The announcement of Summers’ withdrawal led to a Dow rally of 118 points, as well as a lowering of interest rates, due to the market’s perception that Summers was less committed to the Fed’s current monetary stimulus program, known as Quantitative Easing (QE), than Yellen might be. That elation was underscored by a monthly CNBC poll of “economists, traders and strategists” who weigh in on Fed issues. In July, when the question of who Obama would replace Bernanke with was raised, 70 percent of respondents said Yellen, compared to only 25 percent who said Summers. When they were asked who they wanted to replace Bernanke, the figures were even more lopsided, with 50 percent giving Yellen the nod, compared to a paltry 2.5 percent who favored Summers.

Yellen’s resume undoubtedly sets liberal hearts a-flutter. After studying at Yale under the Nobel laureate James Tobin, a leading proponent of the idea that government can mitigate recessions, she cultivated her career as an academic at the University of California, Berkeley, where she was part of the economic “counterculture” that rejected the notion that markets were efficient. In 1994, she was nominated by President Clinton for a seat on the Fed’s board of governors, where she worked in tandem with former Fed Chairman Alan Greenspan, helping him make the intellectual argument for low interests rates. In 1997 Clinton made her head of his Council of Economic Advisers.

In 2004, she became president of the Federal Reserve Bank of San Francisco, where she continued to advocate low interest rate policies until she came back to serve as Vice Chairman of the Fed in 2010. During a Federal Open Market Committee (FOMC) in 2010, she burnished her interventionist credentials. “I think I am as committed to price stability and the attainment of price stability as any member of the F.O.M.C.,” she contended. “When the time has come, am I going to support raising interest rates? You bet,” she added.

One is left to wonder when that time will be. Many economists argue that Greenspan’s pursuit of a low interest rate environment is one of the main causes of the housing boom and subsequent bust that has left 7.1 million homeowners “underwater” on their mortgages (owing more than their homes were worth) as of the second quarter of this year. That number represents 14.5 percent of all mortgaged homes, more than five years after the collapse occurred.

Furthermore, despite the Washington Post’s contention that Yellen has been the Fed’s “strongest and most persistent voice in favor of doing more to fight unemployment,” many economists argue that the Fed’s approach of near-zero interest rates, coupled with its purchase of $85 billion per month in government and mortgage bonds–the QE component–is precisely what has produced the weakest recovery since WWII. It is a “recovery” marked by a labor force participation rate that has plummeted to its lowest level since 1978, a 4.4 decline in household income since the recovery began in 2009,  a staggering rise in part-time employment that accounts for nearly 75 percent of all jobs created this year, and the reality that 15 percent of the nation, representing a record-setting 46.5 million Americans, remains mired in poverty.

Yet while “Main Street” is stagnating, Wall Street is booming. The stock market is near record highs and the nation’s largest banks are larger than ever. The NY Post’s John Crudele succinctly reveals where the Fed’s current policies have taken the nation, noting that Ben Bernanke has produced an economy “growing only slightly–and even then in fits and starts,” even as Bernanke has “also caused a historic shift in the nation’s wealth–away from people who have cautiously saved all their lives and toward the risk-takers. It’s the same old story: The rich get richer, and everyone else gets screwed,” Crudele contends.

That scenario represents the essence of the aforementioned “economics counterculture” that makes Yellen a consensus pick for Wall Street, congressional Democrats and organized labor, all of whom have a vested interest in a command-and-control economy where government picks “winners” and “losers,” and genuine competition is stifled. Adding to Yellen’s allure is the tiresome PC element articulated by both the Washington Post and New York Times: she would be the first woman appointed as chairman of the Fed. According to the Times, administration officials and supporters contend that Obama “would enrage his party’s base if he were now to reject Ms. Yellen and forfeit the chance to name the first woman to the most influential economic job in the world.” According to the Post, Yellen would be “a historic, glass-ceiling shattering choice.”

In truth, as long as Yellen pursues Bernanke’s easy money policies, her appointment will amount to nothing more than the re-arrangement of deck chairs on the USS Titanic. If last June is any indication, virtually any signal by the Fed that it will begin “tapering” its bond purchases will lead to something like the $3 trillion selloff by global markets that occurred then. And make no mistake: it occurred because those markets have become addicted to the easy money policies the Fed has pursued since 2008. On the other hand, if the Fed keeps printing money, sooner or later the debasement of our currency will manifest itself as an inflationary spiral, the severity of which remains impossible to determine.

In other words, the grossly irresponsible pursuit of quantitative easing has put the Fed in a position where either choice could wreak havoc on America’s economy

And that’s assuming that the Fed can maintain some kind of control. Most Americans wrongly assume that China or Japan buys the lion’s share of U.S. debt. They don’t. As incredible as it sounds, the Fed purchased a stunning 61 percent of the government debt issued by the Treasury Department in 2012, and is on track to purchase 64 percent this year. This is tantamount to using one credit card to pay off another. The rest is sold to foreigners, who have begun easing off their purchases. When they reduce those purchases beyond a certain level, QE becomes unsustainable–whether the Fed likes it or not.

Fed policy makers wrap up their two day meeting today. It is expected they will announce a modest tapering of bond purchases by $10 billion, according to a Bloomberg News survey. What will happens next is anyone’s guess. If Janet Yellen is offered the job, she’d better really want it. It may be the only rationale that matters if she ends up holding the bag for Ben Bernanke’s Keynesian-inspired insanity.

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  • antioli

    Bonds now might make a very good short sale.
    While the media was chasing after the Monica story Summers and the Harvard boys and Phil Graham were busy making it safe for wall street to gamble with other peoples money. When they lost they got bailed out while the Republicans decried those lazy Americans addicted to food stamps.
    Then Romney ran on that platform, Of course he lost.

    • patron

      After 5 years of ZIPR, you are expectings bond yields to go down even further? Whose going to by the corporate bonds less than CCC? Radiated Abe?

      Do you also expect QE 20, modest inflation with $5.00 gasoline, and an S&P 5,000 with 1960 workforce levels?

      Sure, there was no over leveraging in US Finance until Phil Graham got involved. The LTCM crash was such a great time.

      Barney Frank dating HSE execs, and Chris “Friend of Angelo” Dodd corrupting the Senate, and Charles Schummer “everything is fine at Fannie Mae” bear no responsibility at all.

      Why voters liked Romey: fiscal competence, bipartisan experience balancing budgets, creditbility.

      Why voters like Obama: basketball, typography, Jay-Z, free abortions and sex changes.

  • ReyR

    Why do we see so many women in key positions around the New Caracalla? Women tend to respect authority and avoid asking inconvenient questions. They make perfect executives. So perfect that many guards in Auschwitz and Dachau were women. Obedient and not burdened with empathy, able to see through every order.

  • DeShawn

    What a surprise: another greedy jew to lead the Federal Reserve, which is simply a branch of the Rothchild banking crime family. Look it up.

    • patron

      The only responsibility “Joos” have in the current fiscal crisis is that they overwhelming vote Democrat, except those who do are highly liberal.

      • Fritz

        Fewer and fewer do all the time thanks to B.O’s consistent swipes at Israel in favor of radical Islam, but that’s a comment for a different article.

  • rogerinflorida

    It is amusing to read the chatter about whether this candidate, or that, for this post, or that, is going to transform the situation, it’s all BS. The truth is we are completely effed. Our political elite have led us to a place where we apparently believe we can consume without producing and borrow without repaying, and that this state of affairs is quite normal, nonsense of course. As the article states, whoever is the Fed Chairperson is likely to preside over a disaster sooner or later, and no tinkering along the sidelines is going to change anything.

    • patron

      You act like the public bears no responsibility.

      The ease to improve our state of finance astounishes me more than current malfeseance. Voters lacking standards and accountability allows morons and criminals to run rampant.

      • rogerinflorida

        Exactly what responsibility does the public bear?
        You probably think that the US political system runs on votes, it doesn’t, it runs on money, for the simple reason that sufficient money can always buy votes. Do you think anybody in Washington DC gives a damn what you believe? Your congressman doesn’t care, the system is rigged so that 90% will be returned to office whatever the circumstances.
        What ideas do you have to improve our financial state?

        • patron

          Despite the evil of corrupt leadership, they’re not the ones giving birth to a dozen kids while on welfare, then spending welfare on crack and oxies, then shooting up neighborhoods and being dumped in your local ER with a half million dollar hospital bill.

          This populist tune gets old for me when I see drug dealers in front of me buying hot pockets on foodstamps and video games from a wad of cash.

          Welfare and disability work requirements, Coburn’s waste, fraud and abuse bill, zero tolerance crime enforcement.

          • rogerinflorida

            I don’t wish to sound Clintonesque; but I feel your pain! As a societal value we should not be paying people to sit on their asses, I believe that welfare should be paid in food parcels; dried egg & milk, flour, raisins, cooking oil, coffee (the cheap stuff). Rent and power allowances should be paid directly to the providers, no phones or gas allowance. However these measures alone will not solve our problems; Washington DC has to be attacked; all Federal salaries reduced 50% immediately and another 50% next year. The Pentagon has to be brought under control, disband the Air Force, they are useless, fold the Army into the border guard, build up the Navy (it already has an army and an air force). No citizen pays more than 5% of his income in taxes.
            Of course none of this will ever happen; we don’t have Democrats or Republicans really, what we have are Peronists, and the results will be the same for us as they were for Argentina.

    • aileen22

      as Judith replied I am surprised that a single mom can make $4786 in a few weeks on the internet. you could try this out


  • LucidThought

    The Fed’s fiscal policies have distorted the marketplace like every attempt to establish an arbitrarily “ideal” price for any commodity has always distorted the marketplace. Gasoline, rent, energy… the end result is always economic damage. The price of borrowed money is no different. There is no gradual, painless way to end this failed meddling in order to minimize the agony. We can wait for the bubble to burst again, or we can deflate it, but either way, havoc will ensue. The important thing is to NOT REINFLATE THE BUBBLE! Artificially cheap money is the folly of chalkboard economists who believe they can improve upon the efficiency of the harsh, evil market. They can’t, and they never will.

    • Fritz

      That’s because Keynesian economics is based on the flawed idea that economies and employment can be grown by increasing cash flow or the distribution of money. Well what is a dollar bill in actual terms? It’s a piece of paper.The only way an economy can grow is through an increase in wealth creation, not in printing more money and throwing it around. Yet many loons on the left seem to think that there is some sort of magic money tree, based on the false assumption that the majority of government debts are held by foreigners, but that those foreigners in turn owe debts to the U.S government, so they can continue borrowing ad infinitum.

      As we can see by the so called “Quantitative Easing” we have the U.S Federal government issuing bonds and treasury bills with the Federal Reserve purchasing the majority of them, not foreigners. I don’t know how much havoc will ensue from shutting down the presses and deflating the bubble, but the havoc (probably a deep recession) will be short lived. The consequences of the economic train derailing from putting the brakes on the funny money are still preferable to it crashing into the wall.

      • harleyrider1778

        They are increasing wealth by buying up all the worthless stocks and saying they are now worth this many plastic dollars we just printed out of thin air! 200 trillion since 2007 is my latest guess the FED has dumped into this dow market to make it climb! No real value there just all PLASTER COATING and a foam base of plastic pellets!

  • harleyrider1778

    just keep on printing BEN and Yellen im buying green ink stocks!

  • harleyrider1778

    just keep on printing BEN and Yellen im buying green ink stocks!

  • harleyrider1778

    They are increasing wealth by buying up all the worthless stocks and saying they are now worth this many plastic dollars we just printed out of thin air! 200 trillion since 2007 is my latest guess the FED has dumped into this dow market to make it climb! No real value there just all PLASTER COATING and a foam base of plastic pellets!