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Janet Yellen: The Wrong Choice

Posted by Larry Doyle on October 9, 2013 9:03 AM |

President Obama is widely expected to announce this afternoon that he is nominating Fed governor Janet Yellen as the next chairman of the Federal Reserve, the most powerful institution in the world.

I am sure Yellen’s nomination will receive the standard praiseworthy platitudes from a wide array of sycophants deeply embedded in the system.

For those pleasantly hoodwinked by the charades masquerading as our current central bank policy, a Yellen-led Federal Reserve should look just divine. Meanwhile those watching closely would call her style of central banking little more than smoke and mirrors.

The WSJ is more deferential and asserts this morning:

As the Fed’s vice chairwoman since 2010, Ms. Yellen, 67 years old, has been at the forefront of pushing the Fed to use new and risky policies to nurse the crisis-damaged economy back to health. These policies include buying trillions of dollars of bonds to hold down long-term rates in hopes of lowering unemployment, a program known as quantitative easing, or QE.

New and risky policies? In hopes of lowering unemployment?

Remember, hope is certainly an important virtue but when it comes to finance and central bank policy . . . hope is a lousy hedge.

Creating bubbles via QE may be nice for those with excess reserves buying cheap assets (i.e. Wall Street banks and the like), but let’s be honest. How has QE really helped the Fed in its stated mandates of lowering unemployment and generating stable prices?

Many a lapdog will point to the current unemployment rate of 7.2% and say QE is working. Similarly, they will point to an inflation rate of less than 2 percent and say we need even more QE. For those who look beyond USA Today to get their news, they know that a labor participation rate at 35 year lows is far more indicative of the current health of our labor market.

And in regard to inflation, remember “garbage in, garbage out.” While Uncle Sam goes abut fudging the inputs to calculate inflation, for those paying ever higher prices for a wide array of goods and services, inflation continues to undermine quality of life. Who gets this? The American Institute for Economic Research provides the following pictorial that paints the proverbial ten thousand dollars . . . er, words.

And Janet Yellen wants more of the same QE on steroids to rescue us from this morass?

Whatever happened to sound central bank policy in which a currency is defended and rigorous regulatory oversight of banking practices is delivered? I guess that approach remains dead and buried in the midst of the central bank cesspool filled by Alan Greenspan and further filled by Ben Bernanke.

Seriously folks, bring an extra set of waders and navigate accordingly.

Larry Doyle

Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Andrew

    LD- I could not agree more. How is it that the person that directly controls the value of the U.S. currency is a political appointee, and not an elected official?

    Not what our founding fathers had in mind, for sure.

  • Mark J. Novitsky

    How about this? Every 4 years we elect a National Attorney General? Call it the Gonzales/Holder Never Again Amendment.

  • Steve

    What, exactly, are you defining as “charades masquerading as our current central bank policy”? How is “smoke and mirrors” an accurate definition of exchanging non-interest bearing cash for interest-bearing Treasuries and agency mortgages?

    While I agree with you that the current policy probably has little to no effect on employment, I am very doubtful that other policy options would have any better effect. As you know, I operate from an educational deficit. However, I am pretty confident that the decision-making regional bank presidents, Fed board members and the economics staff (according to the Fed website – “three divisions have approximately 450 staff members, about half of whom are Ph.D. economists”) most likely are not operating from “hope”. Reading their research it would appear that they have confidence in the largest academic monetary experiment in the history of the world. Time will ultimately be an impartial judge of the policy.

    In short, I see the Federal Reserve as best described by John Kenneth Galbraith in chapter nine of his book, The Economics of Innocent Fraud. They are “our most prestigious form of fraud, our most elegant escape from reality”.

    Regarding “those with excess reserves buying cheap assets” I note that since the Fed started paying interest on excess reserves in early October 2008, net dealer holdings of agency MBS have dropped from about $80 billion to about half that level. In the commercial banking world (which, among other things, the policy was designed to stabilize) over this timeframe securities to deposits have dropped by a few percentage points while cash as a percent of deposits have gone up almost 20%, increasing from approximately $500 billion to almost $2.5 trillion.

    I’m not going to beat on this because I am already out of my intellectual league. I will note, however, that on Monday, October 6, 2008 (the day that the Fed started paying interest on bank reserves) the U.S. Dollar Index (DXY) stood at 81.675. Today I see a close of 80.376, down all of 1.6%. While I agree wholeheartedly that the Fed’s regulatory oversight of banking was pathetic, its defense of the dollar hardly warrants the definition of a “central bank cesspool”.

    Now I know that there is a contingent out there that salivates profusely at language and descriptions that you have used here in this piece. Some of them are currently trying to shut down our government in an attempt to defund a law passed by Congress and ruled on by the Supreme Court. I personally am a little bit wary of that group, and prefer facts and legitimate alternative policy ideas to hyperbole.

    • LD

      Steve,

      I love your engagement.

      I should have been more explicit. I am referring simply to the monetization of our debt and the accompanying ongoing devaluation of the currency. The devaluation has gone on for a lot longer than just the last few years where it has benefited from being the largest dwarf in a world of midgets.

      I should have also highlighted that the policies that should be pursued are a stable currency combined with real structural reforms of entitlement programs, an overall flattening of the tax code combined with an eliminating most parts of the carried interest benefit, and investment credits tied to meaningful job creation.

      The bulk of these programs fall outside the domain of the Fed which has been compelled to provide excessive liquidity given that the other folks in DC are largely sitting on their thumbs.

      GREAT comment. You force me to think which I always appreciate.

      • Steve

        That is an excellent response, sir. Excellent. Agreed wholeheartedly with everything you present. You call QE by its proper name, identify the largest of the vertically challenged currencies, and get to the heart of the matter which is fiscal policy with some great recommendations.

        Unfortunately, this critical element of fiscal policy is being mismanaged today on an epic scale and the ideas you describe just sit there and are not acted upon.

        Very much looking forward to reading your book.

        • LD

          Steve,

          Continuing this discussion, I think you might find this commentary from Project Syndicate to be of interest:

          To be sure, Fed officials did not do a great job of managing expectations in the weeks preceding their September policy meeting. Having also struggled to reclaim the narrative thereafter, there is great interest in understanding what led the Fed to act in such an uncharacteristic manner.

          Nonetheless, the real issue is that the Fed’s last-minute change of heart does not significantly alter the main challenge that the highly qualified Yellen will face: persistently weak economic fundamentals and doubts about the continued effectiveness of the Fed’s policy tools.

          The Fed’s Surprise and Yellen’s Challenge

  • Tim Favero

    Larry, informative article as always. I am always fascinated by government statistics and I am beginning to distrust them more and more. While the Fed claims to say that they are keeping inflation in check, the methodology has changed over the years. The CPI used to be measured as a constant cost of living while maintaining a constant standard of living.

    Where the CPI at one time met those parameters desired by the public, government efforts turned the CPI away from measuring the price changes in a fixed-weight basket of goods and services, to a quasi-substitution-based basket of goods, which destroyed the concept of the CPI as a measure of the cost of living of maintaining a constant standard of living.

    The changing costs of maintaining a constant standard of living were measured by pricing out a fixed-basket of goods and services—same components, same weighting—period after period. Whatever the percentage change was in the cost of that basket of goods, that is how much income would have to rise in order for someone to maintain a fixed- or constant-standard of living over the given period. At least it was a reasonably consistent approximation of same.

    Traditionally, what a consumer paid out-of-pocket for goods and services reflected adjustments for quality changes that could be directly quantified in a monetary sense. Quality adjustments that can be measured directly in price are legitimate, such as measuring the price differential of an eight-ounce candy bar that is reduced in size to six-ounces but remains priced and packaged in the same sized box as the eight-ounce version.

    However, the way inflation is calculated now is completely different than it was under the Carter and Clinton administrations. If the consumer price index (CPI) and the statistics and calculations that go into figuring the index, pre-1990 current inflation would be at 4.9%. Pre-1980, it would be at 9.1% according to Deutsche Asset & Wealth Management, the investment arm of Deutsche Bank, A.G. The government has current inflation at 1.5%. This report is dated May 2013.

    I find the government and their statistics, including the U3 unemployment rate at 7.2% disingenuous because the labor force participation rate is at a 35 year low. And the inflation rate at 1.5% is a joke.

    What other manipulated statistics, is the government producing?

    Deutsche Asset & Wealth Management: The Phantom Menace: Is The Inflation Threat Hype — Or Real?

  • http://kahudes.net Karen Hudes

    The lid is off the corruption at the Fed that I have been reporting (See http://www.larsschall.com/2013/05/08/governance-issues-at-the-world-bank-a-security-risk-to-the-world-order/
    http://www.scenarionews.org/interview-karen-hudes
    US allies are publicizing my reports of corruption, since the mainstream media, owned by the super entity that owns the Federal Reserve (http://arxiv.org/PS_cache/arxiv/pdf/1107/1107.5728v2.pdf)
    refuses to inform the American public. http://rt.com/shows/sophieco/world-bank-us-shutdown-820/
    Since May 19, 2013 (when the US reached its borrowing limit under standard procedures) states and local governments are no longer allowed to issue bonds. Treasury has been fiddling with the Postal Service Health Fund and Civil Service Retirement Fund to get headroom since then. http://www.affna.org/blog/ebatista/cbo-document-debt-ceiling-federal-pensions-and-social-security State Governments are fed up with the Federal Government. Congress has failed to call the Constitutional Convention that they “shall call” despite the fact that 49 of all 50 state legislatures have submitted 400 (or more) applications requesting a constitutional convention. (far in excess of the two-thirds requirement) https://en.wikipedia.org/wiki/Article_Five_of_the_United_States_Constitution The mainstream media has also covered this up, leading people to believe that the trigger has not been met. https://en.wikipedia.org/wiki/Convention_to_propose_amendments_to_the_United_States_Constitution http://www.conconcon.org/ http://www.foavc.org/ http://www.forbes.com/sites/ralphbenko/2011/10/03/time-for-a-constitutional-convention-its-the-integrity-stupid-part-2/2/
    The Federal Government is also illegally preventing me from attending the World Bank Annual Meetings, commencing today. The 188 Ministers of Finance attending the World Bank and IMF Annual Meetings are now looking to the states and ignoring the illegal Treasury Department, which has lost all legitimacy in the eyes of its citizens.






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