The Fed’s 100th Anniversary – Part 2: Does Janet Yellen Know What She Is Doing?


Janet Yellen, Ben Bernanke’s successor as Fed chairman, has asked and answered two important questions:

“Will capitalist economies operate at full employment in the absence of routine intervention? Certainly not.”

“Do policy makers have the knowledge and ability to improve macroeconomic outcomes rather than make things worse? Yes.”

The future of the US economy will largely depend on whether she is right about this. Unfortunately there is little or no evidence to support either of her two assertions.

Yellen’s appointment has been greeted with hosannas in many quarters. Economist Mark Gertler wrote that: “Just about everyone with any connection to the world of monetary policy is vigorously applauding Janet Yellen’s confirmation.”

Is this true? No. For example, respected economic writer James Grant takes a dim view of Yellen and of the Fed in general: “Central planning may be discredited in the broader sense, but people still believe in central planning as it is practiced by…[ the Fed]….To my mind the Fed is a cross between the late, unlamented Interstate Commerce Commission and the Wizard of Oz.”

Economist William Anderson compares the Fed and its leaders to Gosplan, the agency charged with preparing economic plans for the Soviet Union, and thinks that it has the same chance of success.

Economic writer Gene Callahan gets to the heart of the matter when he writes that the chairman of the Federal Reserve “is the head price fixer of a price fixing agency.”

Why would anyone say this about the Fed? Because the Fed fixes some interest rates and manipulates others, and interest rates are among the most important prices of the economy.

Ironically, retiring Fed chairman Ben Bernanke has acknowledged that: “Prices are the thermostat of an economy. They are the mechanisms by which an economy functions.”

Most economists agree that price controls destroy an economy. But, like Bernanke and Yellen, they often wear blinders which prevent them from seeing that everything the Fed does is a price control.

The Fed claims to set interest rates and make other decisions based on careful inspection of factual economic data. But there is a paradox here as well. The more the Fed intervenes, the more it muddies the data it is watching.

For example, during the housing bubble, reported inflation fell as house prices rose. Why? Because reported inflation measures rents, not house prices, and the more people bought houses, the fewer rented, and the more rents fell.

The Fed then claimed that there could not possibly be a bubble in the economy because reported inflation was falling.

It should be obvious that the more the Fed fixes prices and otherwise tampers with markets, the less it can learn from market data, the more it becomes like the Soviet Gosplan, groping in the dark, but nobody at the Fed is willing to admit this.

The Fed record of failure for a century speaks for itself, but the prognostications of Fed leaders are not any more reassuring. Ben Bernanke has an almost unbroken record of being wrong.

In 2006, at the zenith of the housing bubble, he told Congress that house prices would continue to rise. In 2007, he testified that failing subprime mortgages would not threaten the economy.

In January 2008, at a luncheon, he told his audience there was no recession on the horizon. As late as July 2008, he insisted that mortgage giants Fannie Mae and Freddie Mac, already teetering on the verge of collapse, were “ adequately capitalized [and] in no danger of failing.”

Following the Crash of 2008, Bernanke’s prognostications did not much improve. Nor did Yellen’s, who had also misjudged the housing bubble, and who became Fed vice chairman in 2010.

The two of them got the “recovery” they predicted, but the weakest “recovery” in history. Real income for the average American fell during the recession, but then fell even more after its supposed end, and now hovers at a level last seen in 1989.

It has been, in Paul Krugman’s phrase, a “rich man’s recovery,” and especially a rich Wall Street man’s recovery.

The hows and whys of the Fed’s recent performance are covered in a third and final article of this series entitled” How Did Janet Yellen Become The Second Most Powerful Person in The World.”