Author Topic: IBD Yellen Comments Suggest Keynes Holds Sway At Fed  (Read 130 times)

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Offline mystery-ak

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IBD Yellen Comments Suggest Keynes Holds Sway At Fed
« on: May 08, 2014, 08:11:16 PM »

Yellen Comments Suggest Keynes Holds Sway At Fed

Posted 06:10 PM ET

Monetary Policy: Fed Chairwoman Janet Yellen says she doesn't know whether we live in an oligarchy or a capitalist society. We hope that's a terribly sophisticated joke that we just don't get. If not, we're all in trouble.

Sen. Bernie Sanders of Vermont, in a telling exchange with Yellen on Wednesday, wondered: "Are we still a capitalist democracy or have we gone over into an oligarchic form of society in which incredible economic and political power now rests with the billionaire class?"

It was a loaded question straight out of Marxist theory — which is not surprising, given that Democrat Sanders has in the past described himself as a socialist.

What was surprising was Yellen's response:

"I don't know what to call our system or how to — I prefer not to give labels; but there's no question that we've had a trend toward growing inequality and I personally find it (to be a) very worrisome (trend) that deserves the attention of policymakers."

We're not sure what Yellen is getting at here, but nowhere in the Fed's bylaws or the Constitution have we seen any notion that "correcting" inequality in America is the government's job.

We're not even sure inequality is a bad thing, since it signals what works — and what doesn't — in our economy. As for "oligarchy" — please. Yellen should have swatted that question down immediately.

Still, her remarks should concern Americans for a number of reasons.

One, they suggest how she views the government's — and the Fed's — job. It is there, in classic Keynesian fashion, to smooth over the bumps of the free market by stimulating the economy or slowing it down.

Sounds good in theory. In practice, it's not.

Fed mistakes have been a main cause of virtually every recession since the bank's founding in 1913. Yet in the past six years, the Fed has been granted greater power than it's ever had — to the detriment of the economy.

Two, it's not clear the Fed can — or should — do anything about inequality. While it's true the gap between the highest incomes and the middle and bottom has widened, that's more due to education, training, work skills and human capital.

The Fed can't address any of these, and shouldn't try.

Three, based on recent comments, and like many other central bankers, Yellen seems to believe there's a trade-off among economic growth, inflation and jobs.

In this theory, a slowing economy "causes" low job growth and low inflation, while an accelerating economy "causes" higher job growth and more inflation — the so-called Phillips curve trade-off.

So the game for the Fed is to use its monetary and regulatory levers — interest rates and bank reserves — to raise or lower U.S. output.

The current zero-interest rate policy and quantitative easing are an example of this wrongheaded belief that the Fed can create jobs with its monetary mojo.

In fact, contrary to the theory, more jobs and faster growth do not create inflation, as history has shown repeatedly. Indeed, our greatest periods of growth — the 1960s and late 1990s spring to mind — have been periods of low or falling inflation.

We know it's still early in her tenure as Fed chief. But it will be hard for Yellen and the rest of the Fed to get policy right if they apply a false template to the economy and don't really understand how it all works.

On this score, the Fed chief's recent comments are disturbing, to say the least.

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