One Printing Press to rule them all
In the Land of The Fed where the Shadows lie. – Lord of the Rings parody
The Fed’s printing press will be handed over to Janet Yellen early next year. How will she handle such immense power?
In Negative Interest Rates and Janet Yellen we noted how Alan Greenspan (Federal Reserve Chairman 1987-2006) a former free market adherent succumbed to the interventionist powers of the Fed:
“Alan Greenspan was a former banker and Ayn Rand acolyte gold bug before becoming Chairman of the Federal Reserve. ‘Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.’ Greenspan wrote in “Gold and Economic Freedom” and published in Ayn Rand’s “Objectivist” newsletter in 1966.
During Greenspan’s tenure as Fed Chair he confounded us with an inimitable and often indecipherable verbal style. From softening the effects of the 1987 stock market crash (the Fed “stands ready to serve as a source of liquidity to support the economic and financial system”), to his attempt to jaw bone some of the “irrational exuberance” out of the nascent Nasdaq .com bubble in late 1996, to the arrangement of a bailout of Long Term Capital Management in 1998, to the pouring of liquidity into the market and lowering of interest rates in 2001 post 9/11, Greenspan’s Fed tenure had a decidedly interventionist streak that was antithetical to his pro free market/anti statist views of two decades earlier. Indeed, Mr. Greenspan’s Fed used an interventionist monetary policy so often to prop up the markets that such actions were called the “Greenspan put”.”
We also noted how Ben Bernanke (Federal Reserve Chairman 2006-present) grabbed hold of the dollar printing ring and made good on his threat to drop money from helicopters to combat deflation, earning him the nickname “Helicopter Ben”. Mr. Bernanke, transformed Mr.Greenspan’s low interest rate policy to a NO interest rate policy and embarked on an unprecedented series of quantitative easing (QE) programs totaling nearly $4 trillion, consisting of dollars printed out of thin air.
Now the dollar printing ring will be turned over to Janet Yellen. There has been speculation that she, like her predecessors, will succumb to the powers of the ring and continue the current trillion dollar a year QE program or perhaps increase it.
The President and the media, however, have been tempering such speculation, portraying Ms. Yellen as one who first spotted the excesses in the housing market in the mid 2000′s before the bubble burst. The media is also portryaing Ms. Yellen as one who is “concerned about excessive inflation“. In other words, the dollar printing ring is in safe responsible hands. We know better, we have already seen a supposedly more responsible character fall to the powers of the ring. Alas, poor Alan.
Janet Yellen and the Housing Bubble of the mid 2000′s
The media accounts of Janet Yellen spotting the housing bubble in 2005-06 are not true. Austrian economist, Peter Schiff does an excellent job of showing how numerous media outlets have been regurgitating this spurious myth and portraying Ms.Yellen as a modern day Cassandra. In the linked video above, Mr. Schiff points out that Ms. Yellen did not identify the housing bubble and in the instances when she mentioned the possibility of a housing bubble, she dismissed them.
Mr. Schiff knows something about economics and housing bubbles as he warned repeatedly (often subjecting himself to laughter and ridicule on national television) of a housing bubble in 2005-06.
Peter Schiff Warns of a Housing Bubble and of the Crisis of 2008
People are often enamored with and give leadership authority to people who spot issues first; hence this rush to recreate the history of Janet Yellen as forecaster of the housing bubble. Conferring leadership on people solely because they spotted an issue first is a mistake. While its important to be able to spot issues, knowing what to do about them and actually doing something is even more important. The first person to spot an issue is not necessarily the best person to solve it.
If Ms. Yellen spotted the housing bubble first (she didn’t), what was she doing about it? Was she dissenting when the Greenspan Fed voted for lower interest rates? From 2004-2006 Ms. Yellen was a non voting member of the Fed Board of Governors during the Chairmanship of Mr. Greenspan. There is no record, however, of Ms. Yellen’s dissent regarding the low interest rate policies of the Greenspan Fed. Indeed, in a speech Ms.Yellen gave in October 2005, she argued that IF a housing bubble were to form, the Fed should not use monetary policy to deflate it.
The Yellen Doctrine: the Fed can use monetary policy to unwittingly inflate asset bubbles through low interest rates, negative interest rates, or QE, but then not use monetary policy to deflate them!
Janet Yellen: Negative Interest Rates and “Concern About Excessive Inflation”
Ms. Yellen has stated that she would be in favor of negative interest rates. This means in effect that bank customers would pay to have their deposits held by the bank. This would, of course, accomplish what Ms. Yellen would like: to discourage savings and encourage spending such that the Fed could achieve its 2% inflation target. (we will leave the inanity of this economic premise alone for now)
The Wall Street Journal cites Ms. Yellen’s “record of concern about excessive inflation” as a positive attribute. We noted previously that this is a foolish statement. Her concern about inflation has not prevented her from advocating inflationary negative interest rates and money printing schemes like QE. Extolling Ms. Yellen’s “concern about excessive inflation” is like praising a kid playing with matches in the woods as someone who is concerned about raging forest fires.
We don’t expect Ms. Yellen to relinquish the power of the dollar printing ring and toss it into the fires of Mt. Doom. We expect her to relish it and use it to its full powers- to our detriment.
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