For the first time in over a quarter century, it appears, a Democrat will serve as head of the Federal Reserve System. Janet Yellen, Fed vice chairman, has been nominated to replace Ben Bernanke when his term ends in January.
It’s a key appointment in several respects. Yellen will be the first woman in the position, a fact of supreme importance to the mass media, which has played it up as though nothing else mattered — another of the “firsts” it loves to trumpet as a kind of cheap journalistic thrill.
Far more important are other factors related to the Yellen selection. First of all, she’s a member of the president’s own party, the first such chosen since 1979, when Jimmy Carter picked Paul Volcker for the banking post. It’s a departure for President Obama, who’s had a penchant for seeking out moderate Republicans (e.g. Jon Huntsman, Chuck Hagel, Judd Gregg, Roy LaHood) to fill cabinet and other positions in the never-ending quest for middle-of-the-road bipartisanship.
Given that the Fed has become the major player in setting national economic policy (a consequence of routine political gridlock elsewhere in Washington), its ideological complexion is not only important within the narrow sphere of finance, but crucial to the economy as a whole. It’s therefore worth emphasizing that no Democrat has served as chairman since Ronald Reagan held office — no one, in other words, who believed in liberal economics. This explains a lot about what’s happened to the US economy over the past three decades.
Democratic Presidents Clinton and Obama have been complicit in the reign of economic conservatism. Alan Greenspan, Fed chairman from 1987 to 2005, was an Ayn Randisciple, a monetarist who favored high-interest, tight-money policies and financial deregulation; he was appointed by Reagan, but reappointed twice (1996 and 2000) by Bill Clinton. Ben Bernanke, who succeeded Greenspan, was (until the 2008 financial crash and the onset of the Great Recession) an ideological clone of his predecessor; first appointed by George W. Bush, he was reappointed (2009) by Barack Obama.
The Federal Reserve Board and its chairman walk a fine line; they’re charged by statute with both controlling inflation and expanding employment, goals that are often (in fact, usually) diametrically opposed. In recent times, however, the bias has almost always been in favor of containing inflation, which works against economic growth and job creation.
A little inflation is a good thing; it helps those in debt (who repay in cheaper dollars) and encourages borrowing for business expansion. But bankers and creditors in general hate it, so Republican Fed chairmen, who view bankers as their real constituency, typically opt for high interest rates and slower growth to wring inflation out of the system. And they almost always favor limited regulation of the financial sector.
Ben Bernanke, in his post-crash quasi-Keynesian incarnation, has shattered the GOP consensus with radically low interest rates, risking inflation to spur the economy by encouraging corporate borrowing. Simultaneously, he’s instituted a regime of “quantitative easing” — printing money to buy Treasury and mortgage bonds as a stimulus program. Interest rates set by the Fed (invariably followed system-wide) are now effectively at zero in percentage terms, and pd olicy has gone from one extreme to the other. Liberals would normally cheer, but zero interest has actually hurt small savers, a Democratic constituency, without boosting investment or employment.
As former FDIC Chairman Sheila Bair puts it, quantitative easing and zero interest have “acted like a narcotic,” artificially boosting stock and bond prices without improving the general economy. That’s because, regardless of historically low interest rates intended to encourage capital spending, business is not investing and not creating jobs. In fact, according to USA Today, US corporations are investing less now than during any recovery since 1952, a development it credits to that old standby “lack of confidence.” Translation: businesses are afraid they won’t make as much money investing as they would like, so why bother. Meanwhile, the low interest rates they decline to take advantage of are severely penalizing the thrifty, especially seniors on fixed incomes dependent on bank interest from retirement CDs.
Enter Janet Yellen. Yellen, considered in Fed speak a “dove” who focuses most on unemployment rather than a “hawk” concerned most about inflation, is also pro-regulation in terms of financial markets; this makes her a moderate liberal as members of the Federal Reserve Board are measured. Her prior policy history includes resistance to Alan Greenspan’s efforts in the 1990s to force the inflation rate down to zero regardless of the impact on employment, as well as prescient support for measures to deal with the housing crisis that eventually led to the 2008 financial crash.
Yellen was not Obama’s first choice. Both Lawrence Summers and Timothy Geithner, part of the Wall Street-friendly Bob Rubin gang, ranked ahead of her in the president’s estimation. But Summers, anathema to Democratic liberals and likely to provoke a party revolt, thankfully withdrew his name, and Geithner never wanted the job. So the nomination went to Yellen by default, which in the end may be a stroke of luck for the president.
It’s an open question as to why Obama leans so heavily in the direction of the Wall Street types who drove the economy into the ground with their deregulatory policies. One school of thought is that he knows little about economics (not a prime concern of constitutional lawyers) and has therefore overly depended on the conservative-leaning financial team he inherited from the Clinton administration. Another is that the president recoils by nature from unconventional policies (even when needed) and feels comfortable with establishment figures who provide familiar bromides. Still a third is that Obama, like many presidents, is most at ease appointing people he knows firsthand and trusts. Thus, the disastrous ascension of Tim Geithner at Treasury based on his personal rapport with the president.
So, the Janet Yellen nomination falls into the category of a happy accident. There’s just one caveat concerning her rise to the Fed’s top job: along with quantitative easing (i.e. spending), she fully endorses the Bernanke prescription of zero interest rates, the gift to corporate America that never gives back. The first of these may make sense; the second is counterproductive. The question is whether the new chairman will have the flexibility and imagination to reassess on the fly. We’ll soon know.
Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He is the author of two prizewinning books.
From The Progressive Populist, December 15, 2013
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