With Ben Bernanke’s chapter as Chairman of the Board of Governors of the Federal Reserve System officially closed, Janet Yellen has recently received the approval needed to be next of kin. Bernanke’s tenure, fueled by ultra-dovish policy and marred with the worst financial implosion since the 1930’s has had an ending long-awaited. With that said, we needed a bit more insight on his female replacement now holding the reins of the single most powerful position in the financial world. A closer look at Janet Yellen…
Queen of NY– Yellen is local to New York like other financial kingpin’s such as Goldman Sach’s Lloyd Blankfein and JP Morgan’s Jamie Dimon – her native being Brooklyn. Her education is Ivy and stellar, graduating summa cum laude from Brown University with a degree in economics and moving to be an official Yale “Eli” in receiving her PhD from YU in 1971. Among her classmates – George W. Bush, Bill and Hillary Clinton. The ‘circle of success’ as they call it. Her close ties to the Clinton’s, most likely not a coincidence as her appointment to Fed Chair by Barack Obama comes amid much chatter about a likely Hillary campaign in 2016. Chalk it up to the way of the world.
Educator – Unlike President Obama, whose reputation as a professor at the University of Chicago was interestingly forgettable, Yellen’s tenure as college professor in the 70’s was filled with much praise. Starting at Harvard and then moving to the University of California Berkley, where she was awarded the Haas school’s outstanding teacher twice.
From there, amid the rampant inflation of the 70’s after Nixon’s removal from the gold standard, Yellen got her foot in the door working as an economist with the Federal Reserve Board of Governors where she worked diligently until she became an official member of Board in 1994.
All the right moves – Yellen rode the economic wave of the 90’s, accompanied by mass American outsourcing and great technological innovation and in-ed with the Clinton Administration as chair of Council of Economic Advisors from 1997 to 1999. Building the right relationships and finding herself in a neat position to hopefully parlay from one Clinton to another in the 20th to 21st century.
Second in line – Up until her appointment as Chair, Yellen had served as President and CEO of the San Francisco Federal Reserve – her most prestigious position to date within the banking empire. Her appointment by Barack Obama came after frontrunner Larry Summers stepped down in consideration for reasons unclear, but hinting at controversy over Summers involvement as one of the leading cohorts in the deregulation of Wall Street and derivatives market preceding ’08 economic calamity. Summers being quoted, “I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration or, ultimately, the interests of the nation’s ongoing economic recovery.” An honest musing that should make Ben Bernanke blush.
Czar-nation – President Obama then turned his attention to the more dove-ish Janet Yellen and nominated her as the next Federal Reserve chair. Prior, the president had appointed 44 individuals into positions of authority without Congressional approval, Yellen making it 45. These appointees have been described by critics as Obama’s “czar” assembly, a term that within American context can be rooted back to the Federal Reserve’s most coveted endorser, Woodrow Wilson(signed the Federal Reserve Act into law 1913) who during WWI appointed financier Bernard Baruch to run the War Industries Board; Baruch thus being coined the “industry czar” by the media. History always tells the story, right?
Yellen’s backing was accompanied by fellow “czars” and former colleagues, including but not limited to Sylvia Mathews Burwell(director of the Office of Management) and Jack Lewis(Treasury Secretary), proving that she would know faces in high places who could not only support her election but back future policies.
Lacking Support – Even with Obama’s backing, Yellen lacked confidence throughout the democratic Senate. The vote for Yellen as Fed Chair ended up at 56-26; a 68% approval. Yellen’s approval may have been even worse if a series of inclement weather didn’t keep a chunk of Senators from voting, many speculating that the nays would have surpassed 30. While the number doesn’t sound shockingly low, it’s the lowest Senate support on record for any Fed Chair.
Where to next? With a comfortable understanding of Yellen’s lead-up, we understand that predicting the future is far more valuable than explaining the past. So, a quick look ahead and the bottom line…
Can Janet Yellen’s leadership and monetary policy lower unemployment, raise inflation, and maintain the health of our currency via economic recovery?
No, Yes, and No – but we’ll get there. First, understanding the strategies being employed by the Central Bank from the top-down is crucial. The new leader of the Fed shares very similar ideologies with her predecessor Ben Bernanke; her belief is that extremely dove-ish policy; IE easy money programs, asset purchases, and stimulus are the primary function in controlling the flow of money in the system and can therefore regulate economic cycles, interest rates and provide growth needed to recover from economic recession. This is historically known as Keynesian Economics, named after the economist John Maynard Keynes who believed that the solution to a poor economic environment was to regulate the circular flow of money, or “prime the pump” to increase spending, which in turn increased earnings… leading to more spending and earnings. This point of view stands in opposition to laissez-faire capitalism, in which the currency supply and economy are left alone for the market to regulate for itself.
We have been in a heavily regulated Keynesian State for years now, as it has been the main function The Fed has used since the 2008 Mortgage Crisis. Not only domestically, but much of the modern world is following suit, as almost every developed country now uses a Central Bank to control its local monetary supply.
Many believe that amidst the recent drama over whether or not the Fed will trim down asset purchases, Yellen could in-fact ramp up the size of it. Of course, the holes are becoming more and more apparent in the lack of correlation between Quantitative Easing (the name for asset purchases over the last few years) and growth. However, the money printing, asset purchases, interest rate manipulation, stimulus, whatever you’d like to call it… will likely press forward. Even if the Fed continues to slow it down their strategy, the size of previous asset purchases are likely to have already done significant damage to long term economic stability. Here’s the best way to sum up the inflation and unemployment situation as it pertains to Quantitative Easing…
Imminent Inflation – One of the biggest stated concerns for The Federal Reserve is low inflation, as we are well below the 2% range that The Fed would like to see. The recent Consumer Price Index (CPI), which measures inflation, rose at 1.05% for the year and reached its highest at 1.50% in December, together the lowest reading in history for a benchmark dating back over 50 years. This seems almost impossible considering that inflation is caused by an increase in the money supply and in the last four years we have increased the money supply more than at any other time within the same period in our monetary history. Factor in the time delayed nature of inflation. The longer we ease, the harsher the consequence – but the aftermath of such policy may take some time to rear its head. Legendary economist Milton Friedman explains, “on the average in the US over the past 100 years an increase in the quantity of money takes 5-6 months to increase people’s money, and then it’s another 12-18 months before that works through to prices”. A two-year, ballpark number before inflation shines through.
In this case, it may actually stretch a little longer since banks have kept much of the stimulus capital in reserve rather than lending it and allowing it to reach the system. This is a function of Fractional Reserve Banking but will all change because current lending standards are being eased as we speak. Bernanke announced QE4, as an extension to QE3, which doubled asset purchases from $40 billion/month to $85 billion/month(now down to 75B) in December 2012 – so simple math concludes that us somewhere in mid 2014 we begin to see a spiked CPI. The fact that The Fed is worried about low inflation, while making hundreds of billions in asset purchases is a total oxymoron. Inflation is coming, on the rocks. The result, Stagflation.
Stagflation –When the inflation number catches up to the amount of currency flushed in the system, which will happen when the amount of dollars that banks are holding in reserves is finally loaned to the public (the money enters the working order), we’ll have both high inflation and high unemployment – an economic sickness known as Stagflation. Again, the Friedman way says, “If you continue to use monetary policy to attempt to promote full employment the result would be that you would have higher inflation, and that you would not have lower unemployment.”
Janet Yellen is inheriting a seat of financial authority at a completely unique time in American economic history. The Fed is the largest holder of US government debt in the world, which essentially makes them our government’s owners… nothing more, nothing less. It’s important to know a bit about the woman enthroned with such power and how she got there. With this now understood, we look to the future and listen closely to what is said compared to what is done. We’ve drifted far from the capitalistic free market that is generally synonymous with The United States and moved to a highly regulated, top-down monetary system. By internalizing Janet Yellen’s history and the authority in her future policies, we’re able to – as the people, provide her and The Federal Reserve with a more watchful eye and closer critique.