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

FISCAL MONITOR

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.”

53 comments
4NConsulting2
4NConsulting2

The Fed was also compared to the Gosplan by David Foran in the book "Erroneous Drones: Saving the Economy from Legions of Self-Destructive Liberals". http://amzn.to/12Q4opW

Mike
Mike

If she does know she's evil. If not she's an idiot.

Rob McDonald
Rob McDonald

I predict retirement at 40. When you quit counting, a hell of a lot of work, that means absolutely nothing, goes away.

Jason Douglas Brown
Jason Douglas Brown

She has a lot of degrees and is quite smart just like Larry Summers so she must be ready.

Billy Cook
Billy Cook

She probably knows what she wants and intends to do.

Bell Thomas
Bell Thomas

If you can name a republican that can do a better job with their '''trickle down''' economics, well then, then, you are a liar!

Matthew Thomas Nicholson
Matthew Thomas Nicholson

That was the darkest and most pessimistic bunch of truth I've heard in a month. Not bad.

Geo James
Geo James

This dried up gash, this mopsy-flopsy corporate muppet knows what she is doing? Sure if 'doing' is generally being an ignorant moron who follows what her muppet-masters say...then yes, I suppose so.

Louis C Carl
Louis C Carl

As Roberto Villalobos Jr.said in another thread "If they knew what they were doing it would be a conspiracy to destroy the US economy. Sadly they don't know what they are doing and think they do"

Don Smith
Don Smith

I know what she doing everything that oblummer wont'

Louis C Carl
Louis C Carl

Been "Requisitioned" once, went cheerfully enough for patriotic reasons; anybody attempting to "Requisition" me again is going to discover what an old-man with nothing to lose is capable of. Will express my "passion for humanity" as a volunteer at the Salvation Army, thank you very much.

Kevin Kary
Kevin Kary

Rob your thinking is completely medieval. I don't know how someone could think that anarchy would be a good thing because if you eliminated the only way to barter goods and services like money or something else of value that is exactly what you would have. Total and complete anarchy. The guy with the guns and bullets takes everything.

John Shaffer
John Shaffer

This Jewish crony, and the new Israeli vice chair, will do thier best to finish America off, and loot whats left of it.

Phil Paquette
Phil Paquette

The Fabian Socialists know exactly what they're doing.

Rob McDonald
Rob McDonald

The Democrats don't get to steer at all without making compromises to power and money, it's up to the people to get smart enough to overcome money's ability to propagandize reality and even opinions for it to truly change. Let's just oust all Republicans, and then if the problem is still there we will oust all Democrats. But I'm for getting some more of this type of thing from a super majority of Democrats: http://benswann.com/breaking-california-nullifies-ndaa-indefinite-detention/?fb_action_ids=10152170667170628&fb_action_types=og.likes&fb_source=aggregation&fb_aggregation_id=288381481237582

Xavier Smith
Xavier Smith

Rob the Democrats are doing the exact same thing...

Patrick B. Kerby
Patrick B. Kerby

The Fed only has one tool. The printing press, so her job is not too hard.

Rob McDonald
Rob McDonald

What needs to go away is monetary systems. Entrepreneurial people could still requisition employees to accomplish their goals, but the key is, it would be a passion for humanity, rather than a passion for money. It would take much less work to supply everything to everybody than it does to limit and count.

Rob McDonald
Rob McDonald

That doesn't need to go away, and in fact the entrepreneurial cycle has been broken by the corporations as they have bought the GOP and set up protected capitalism where they win and everybody else loses.

John Lee
John Lee

They should celebrate this with an End The FED party.

Xavier Smith
Xavier Smith

Capitalism is what attracted people from all over the world to America...the opportunity to create and own their own businesses...now we're looking more like Europe so everyone wants to live off of the state......

Xavier Smith
Xavier Smith

This country hasn't practiced capitalism since the government started getting in bed with big business, true capitalism allows people to lift themselves out of poverty...socialism makes everyone equal...equally poor....

Rob McDonald
Rob McDonald

The GOP are not socialists, when the fuck do you think the economy crashed? They destroyed our economy and our country with it! Their principles blew it all up, and our debt service is ridiculous on a debt that Al Gore planned on paying off by 2010! Socialism was working fine, now the rich might just lose their heads for all the anti socialism they have pushed over the last 40 years! Treasonous bastards will deserve it!

Rob McDonald
Rob McDonald

I am a socialist, I have watched capitalism not only fail us, but people die over profits, fuck this world as we were born into it, if it doesn't work for everybody, then it doesn't work at all!

Michael Erickson
Michael Erickson

If she does. She would be the only one in this Incompetent OVOMIT administration

Xavier Smith
Xavier Smith

100 yrs of robbing the American people blind...

Kathy Baugh
Kathy Baugh

I doubt it. She will do as she's told, like everyone else.

William Anderson
William Anderson

yes she is robbing the working man blind and everybody is too bussy watching sports or miley to see it

Rob McDonald
Rob McDonald

Hmm, let's review. The Republicans want to cut unemployment which will likely start another mortgage crisis, and could bring down our economy. At the same time, on his way out, Bernenke is cutting fed help, as he says the economy can stand on it's own. GOP, and their cronies are running this scam on us again, and this time they need to lose their heads: http://www.norcalbeat.com/republicans_like_recessions.htm

Ray Anderson
Ray Anderson

As a Keynesian Corporatist she sure does know what she is doing!

Chris Ellsworth
Chris Ellsworth

There are no Keynesians that know what they are doing.

BryanScaggs
BryanScaggs

And the fed giving billions to big businesses and banks isn't "trickle down"? Actually probably not, they don't care if the money spreads, as long as they look good and their friends get that cash.

BryanScaggs
BryanScaggs

There need not be government to have currency. Neither should there need to be a Federal Reserve. How did this man get the gun  and bullets he uses to take everything? If he got  it within an Anarchist society then you can bet most other people have them too. Without government there is no all powerful group of people that control everything, because they did so through the government.

Mike
Mike

Is this a joke or is your IQ in the single digits?

Glenn Harpin
Glenn Harpin

You are Twisted. I hope you do not believe what you say. Your a mike wide and a half inch deep. :P


Mike
Mike

"I am a socialist"

That's because you're stupid.