The choice that awaits Ben Bernanke's heir apparent.
Now that former Clinton Treasury Secretary Treasury and former Harvard University president Larry Summers has withdrawn his name from consideration as the next chairman of the Federal Reserve, Fed Vice Chairman Janet L. Yellen has seemingly become the leading candidate for the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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