The Coronation of Janet Yellen
“As a first line of defense, we have a variety of supervisory tools, micro- and macro-prudential, that we can use to attempt to limit the behavior that is giving rise to those asset price misalignments.” Janet Yellen’s circular, Greenspan-like response to a simple question about How the Fed should deal with “asset bubbles”.
On Thursday, the Senate Banking Committee conducted hearings to decide whether Janet Yellen would be confirmed as the next chairman of the Federal Reserve. Yellen, who was nominated by President Obama, is in line to replace acting Fed chairman Ben Bernanke in January 2014.
Despite the controversy surrounding the Fed’s unconventional monetary programs, which have buoyed stock prices to record highs but failed to pull the economy out of the doldrums, the hearings were largely uneventful. For the most part, senators were civil and reserved, while Yellen was courteous and attentive. Aside from some predictable grandstanding, there were no hardball questions, no hectoring, and no impassioned denunciations of Central Bank policy. The Committee’s performance was as perfunctory as any ever given on Capital Hill. Yellen was never in trouble nor was her confirmation ever in doubt. She breezed through the 3 hour confab without as much as a scratch.
Yellen is as slippery as they come. She skillfully dodges tough questions by poring over arcane economic theory that sounds like an answer, but really doesn’t reveal anything about how she plans to lead. She also has a good sense of how her diminutive appearance works in her favor making it impossible for male senators to be too tough on her without being seen as “sexist” or “bullies”. Also, she’s already mastered the opaque language of the Fed, that is, she knows how to use circuitous, jargon-laden koans and pompous-sounding gibberish to conceal the Central Bank’s real agenda which is to shift more wealth to its constituents on Wall Street.
On the two questions that were on everyone’s mind–QE and asset bubbles–Yellen was characteristically evasive. While she opined that she would continue to “support the recovery” (in other words, keep the money flowing to Wall Street.) she obliquely added, “the program cannot continue forever.”
How’s that for clarity? In other words, “We’re going to keep doing the same thing, but we’re going to stop, too…. probably.”
To no one’s surprise, the Committee found this answer entirely satisfying.
Yellen was also asked whether the Fed would cut the rate it pays on excess reserves at the banks, to which she replied, “It certainly is a possibility.”
Yes, Janet, we know it’s a possibility. We also know that’s not an answer. What the Committee wants to know is what you plan to do as Fed chairman. At least, that’s what one would expect elected representatives to ask if they had even minimal critical thinking skills …which they don’t.
Instead of grilling the candidate on conspicuously-flawed policies that have failed to produce a sustainable recovery after 5 years, ingratiating senators, like Chuck Schumer, felt their time would be better spent congratulating Yellen and singing her praises.
“I think you’ll make a great chair, and your Brooklyn wisdom shines through,” beamed the Senator from New York.
Thanks for that, Chuck. You’re a great American.
Yellen’s finest moment —if you can call it that–was her “bubble-denial” performance which makes her a shoo-in for this year’s Oscar awards. Yellen dismissed the idea that the Fed’s $3 trillion liquidity surge had made markets more frothy.
“I don’t see evidence at this point, of asset prices, misalignments. Although there is limited evidence of reach for yield, we don’t see a broad buildup in leverage, where the development of risks that I think at this stage poses a risk to financial stability.”
“Limited evidence of reach for yield or buildup in leverage”? No asset bubbles? Are you kidding me?
Is Yellen aware that margin debt on the NYSE (the money that investors borrow to buy stocks) is now at its highest level EVER. ($401 billion) That’s higher than 2008 before the crash! Wouldn’t you think that would send off a few alarms at the Central Bank where regulators are supposed to be monitoring these things?
And what about corporate stock buybacks which are up by nearly 20 percent this year and are on track to beat their previous peak in 2007. In fact, stock buybacks–which are just a way for corporations to juice their stock prices without adding any real value to their companies–is leaps and bounds higher than real non-residential fixed investment. In other words, corporate fatcats are swapping paper to make bigger profits instead of investing in factories, equipment or improvements which add tangible value. It’s all a big paper chase which has been amplified many times over due to the Fed’s low rates and the ocean of liquidity that’s been pumped into the system.
But Yellen says she doesn’t see any of this. (“I see nothing. Nooothing.”) How credible is that?
Then there’s this from the Testosterone Pit:
“Bubble data keep piling up relentlessly. IPOs (Initial Public Offerings) so far this year amounted to $51 billion, the highest for the period since bubble-bust year 2000, the Wall Street Journal reported. Of them, 62% were for companies that have been losing money, the highest rate on record…..
It’s even crazier in the land of bonds….. So far this year, $911 billion in bonds were issued, also a Dealogic record. Emerging-market bond issuance hit $802 billion, a notch below their all-time record last year…”(“The Day The Bubble Became Official, And Everyone Was Happy”, Testosterone Pit)
Everything is bubbly. Everything. Which is what happens when you pump $3 trillion into financial assets. (The Fed’s balance sheet has exploded to nearly $4 trillion mainly due to QE.)
And did you catch that part about investors dumping $51 billion into companies that ARE LOSING MONEY. Chew on that for a minute. This is just like the dot.com craze when rates were so low that speculators loaded up on everything they could get their hands on. It didn’t matter what you bought, because the loose-goosy monetary policy and uber-leverage kept driving stocks higher by the day. Then–without notice– Greenspan pulled the rug out from under the markets by raising rates which sent equities into the shi**er. Remember that? And now we’re seeing the same thing all over again. It’s like Back to the Future 2.
But Yellen sees none of it, in fact, she wants to keep the money flowing for as long as possible, until the bubble is so humongous that the slightest pin-prick puts the financial system into a death spiral and the real economy slumps back into recession.
It’s madness. Just like it’s madness for the committee to even consider a candidate with Yellen’s dodgy resume. Do we really want someone running the Fed who argued “against” deflating the housing bubble because she thought it would only be “a good-sized bump in the road, but that the economy would be able to absorb the shock”?
How’s that for poor judgment? By my estimate, that “bump in the road” amounted to more than $8 trillion in home equity losses, 5 million foreclosures, 14 million jobs, and a thoroughly decimated US economy. That was a bad call on Yellen’s part, and in a sane world it would have disqualified her from contention. But we don’t live in a sane world. We live in a world where failing upwards is a reality and where the best jobs go to the apple-polishers who nose their way to the front of the line by doing what they’re told and keeping their mouths shut.
And that’s why “punch bowl” Janet is going to get the Chairman’s Suite in the Eccles Building. Because she knows how the game is played.
MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at email@example.com.