Amidst a government shutdown, a debt-ceiling crisis and other assorted financial turmoil, President Obama this week nominated Janet L. Yellen to chair the Federal Reserve Board.
As a Keynesian economist and academician who served as second-in-command at The Fed, her boost to the top spot was about as predictable as another budget crisis in Washington. She still needs to be confirmed by the U.S. Senate, but confirmation there is also as predictable as another budget crisis in Washington.
So what can we expect from the first woman to ascend to one of the most powerful positions in the free world?
Janet Yellen
The presses will keep rolling. Current Chairman Ben Bernanke has become the King of Quantitative Easing, but he has been in denial about it. His roots are as a monetarist. You wouldn’t know it by his record as chairman, but he is a follower of Milton Friedman.
Ms. Yellen, conversely, is a true believer. As an “unreconstructed Keynesian,” which we assume is the opposite of a reconstructed Keynesian, she believes that stimulus is a cure-all. If the government spends more and the Fed prints more, evidence to the contrary, the economy will boom.
As such, we can expect a continuation of QE. The King is dead, long live the Queen.
Jobs will be The Fed’s focus. Chairwoman Yellen will see reducing the unemployment rate as her most important job. That’s commendable, as the real unemployment rate (the U-6 rate) is still close to 14%, but it doesn’t mean that she will be lobbying President Obama to strike the Obamacare employer mandate or lower corporate taxes.
Instead, like Mr. Bernanke, she will continue quantitative easing to boost inflation and will continue boosting inflation to lower unemployment. Granted, five years of QE and record government spending haven’t done much to lower the unemployment rate, but maybe the federal government just didn’t spend enough and The Fed didn’t buy enough bonds. Or maybe Mr. Bernanke didn’t believe strongly enough. This time, it will be different.
Inflation will be our friend. You may have heard of the long discredited Phillips Curve, which linked higher inflation with lower unemployment. In the 1970s, we had “stagflation,” with high unemployment and high inflation. Then The Fed focused on reducing inflation and in the 1980s and 1990s, we had low unemployment and low inflation.
But the Phillips Curve lives on, and if it takes higher inflation to bring down unemployment, Ms. Yellen is all in.
“When the goals conflict and it comes to calling for tough trade-offs,” she said in 1995, “to me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.”
If high inflation did reduce unemployment, at least there would be enough jobs so that your 86-year-old mom who’s on a fixed income could cope with rising costs by going back to work. Now that’s “wise and humane.”
With a little luck, maybe we can have hyperinflation, so we can achieve full employment.
Blowing bubbles. As president of the San Francisco Federal Reserve Bank in 2006, she warned about a housing bubble and its risks to the economy. Unfortunately, she was a few years late with her warning. By 2006, the housing bubble was already too far advanced to prevent major economic harm.
As The New York Times reported: “ ‘For my own part,’ Ms. Yellen said, ‘I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.’ Her startled interviewers noted that almost none of the officials who testified had offered a similar acknowledgment of an almost universal failure.”
At least she’s honest.
So now the person who will have to oversee a careful dismantling of QE is someone who is an even stronger advocate of QE than her predecessor.