Janet Yellen is the Best Choice to be Fed Vice-Chair
Posted by Michael A. Kamperman on March 13, 2010
President Obama and his economic team have finally stumbled upon the absolutely best economic decision they could make by nominating Janet Yellen, President of the San Francisco Federal Reserve Bank, to the position of Vice-Chair of the Fed. Ms. Yellen would go from currently being a non-voting member of the Fed to a permanent voting member of the Fed’s Open Market Committee that sets interest rate and other Fed policies, like quantitative easing. Ms. Yellen is considered a Dove on monetary policy because she believes the Fed has a dual and equally compelling mandate to target both inflation and unemployment, as in current law. Many though would probably prefer a Hawk who would represent someone who tilts toward inflation as being the ever more pressing concern of the Fed, and therefore considers unemployment conditions as secondary to Fed policy. While unemployment is currently our nation’s number one problem, the best reason to nominate Ms. Yellen is not because she is a Dove. It is because she is not an anachronistic ideologue trapped in a 19th century understanding of the role of money in our society. She is the antithesis to Ron Paul and his “get back on gold and get rid of the Fed” religion.
Importantly, Ms Yellen doesn’t believe that monetary policy should be limited to the zero barrier of interest rate policy. Not many people are willing to loan someone some of their money and then pay them to boot. But Ms Yellen understands that in a deflationary environment the Fed needs to seek ways to use monetary policy to stimulate demand even when interest rates are already set at the barrier of zero. Hence, under the right conditions Ms. Yellen is an advocate of quantitative easing. Well, anyone who doesn’t understand that we are in the midst of the right conditions is either dumb, blind, or lying. If not now, when? The Kansas City School District is on the verge of shuttering almost half of their schools due to a severe lack of funds. Washington can simply send the school districts more money and pay for it by having the Fed buy the Treasuries issued to finance the policy. I don’t know anyone who doesn’t want America’s kids to have the best education in the world. So why is Washington twiddling its thumbs while thousand of Teachers continue to get pink slipped?
While President Obama has made a wise choice, I will with-hold rendering judgement on whether the Whitehouse finally gets it, or whether the Whitehous is simply playing politics and throwing a bone to the Progressive wing of the Democratic Party. You see there are two other vacancies on the Federal Reserve’s Open Market Committee that President Obama and his economic advisers have irresponsibly ignored for the last 14 months. If this is stumbling economic luck for us because of politics, then we will know it when President Obama fails to fill the other two Fed seats soon with people who hold similar views to Ms. Yellen. But if the Whitehouse isn’t buying their own snow job on jobs, then they know they need to find Fed Governor’s that will continue quantitative easing rather than those that prefer to end it like the current voting members of the FOMC. After March the Fed will no longer be in the bond market buying up mortgages primarily backed by U.S. agencies. Someone will step in and buy those mortgages. But will someone else be available to step in and buy whatever those people were buying, like junk bonds or Greek Sovereign debt? The Fed and the Bank of England purchased almost $2 trillion worth of U.S. and U.K. debt in the last year. Where does that money come from when they step aside? They have purchased almost as much as China has in foreign reserves. They have purchased more than twice as much as exists in the world’s largest sovereign wealth funds. The only way to replace all of the money is to use leverage, or to resume quantitative easing. Otherwise the world will spend the next year robbing Peter to pay Paul. Please President Obama, show us you get it and put two more Yellen’s on the Fed.
